Inheritance! Everybody wants one and according to an avalanche of media reports over the past decade, the baby boomers are first in line to get the lion's share of the money. Various sources have predicted that anywhere from $10,000 billion to $40,000 billion in wealth is slated to change hands in the coming years, and phrases like "the largest wealth transfer in history" have been bandied about quite a bit. Along with the movement of that kind of money, thoughts of early retirement and a life on Easy Street aren't too far behind. But, guess what? According to a study from AARP, all the hype is wrong. In this article, we'll show you why it's better to build your own nest egg instead of waiting around for your inheritance. (To see more on retiring early, read Retire In Style, Retiring Early: How Long Should You Wait? and Preparing To Tap Into Retirement Income.)

TUTORIAL: Retirement Planning

How the Rich Get Richer
In 2003, the AARP Public Policy Institute studied inheritance data from the Federal Reserve's 2001 Survey of Consumer Finances and produced a report titled, "In Their Dreams: What Will Boomers Inherit?" The information in the report was updated in 2006 based on the latest data from the Federal Reserve Board's Survey of Consumer Finances. The 2006 report suggests that the original findings just don't add up.

According to AARP, some 80% of boomer households have never received an inheritance and don't expect to receive one in the future. Among the projected 19% of boomer households that did receive an inheritance, the median amount received was $49,000. While that kind of money is certainly welcome by all and is probably enough to help fund the purchase of a nice new car or perhaps move up one's retirement date by a year or two, it is not nearly enough to enable anyone to retire and live on the proceeds of their inheritance.

If you factor in the possibility that some of that money was received as gifts during the donor's lifetime, with the rest received upon the donor's death, there is a very real chance that the inheritance will have a diminished impact on the heir's lifestyle. Even if the cash is received all at once, estate taxes certainly take their toll. In addition to federal estate tax, some states also levy an estate tax - together, these taxes significantly deplete what was initially a large sum. (For more information on estate taxes, see Get Ready For The Estate Tax Phase-Out and Getting Started On Your Estate Plan.)

While a medium value of $49,000 is a relatively modest inheritance, affluent families tend to receive more significant amounts of inherited wealth. In 2004, it was found that households with a net worth in excess of $449,739 received almost 25% of all inherited wealth in the United States. Furthermore, the amount of money that they inherited was in excess of $100,000 per household. Overall, this means that some 7.5% of baby boomers will receive a six-figure inheritance. The numbers strongly suggest that, at least where inheritances are concerned, the rich most certainly do get richer.

A Realistic Look at Boomers' Dreams

Figure 1: Percent reporting having ever received an inheritance, by age group, 1989-2004
Source: AARP Public Policy Institute
Figure 2: Percent expecting to receive an inheritance at a future date, by age group, 1989-2004
Source: AARP Public Policy Institute

Looking at Figures 1 and 2, the statistics suggest that 14.9% of baby boomers anticipate receiving an inheritance at some point in the future. More than two-fifths of that money will be inherited by families that are already worth at least $450,000. Furthermore, families with a net worth of a least $160,000 will receive 60% of all inherited wealth. Unfortunately, it appears that if you aren't already rich, inheritance is unlikely to make you into a high net worth individual overnight.

Interestingly, pre-boomers can expect to inherit slightly more than boomers at every level. Nearly 30% expect to receive some form of inheritance, with 15.2% expecting more than $100,000. Post-boomers fare worst of all, with 87.2% expecting nothing at all and just 2.5% expecting in excess of $100,000. The diminished inheritance for post boomers appears logical when considered in light of information from the Government Accountability Office, which notes that a third of boomers don't own any stocks, bonds, mutual funds or retirement accounts and that the wealthiest 10% of boomers account for some two-thirds of all boomer-held wealth. (To learn more about the generational divide in savings, see The Generation Gap.)

Inheritance Vs. the Lottery
Inheriting wealth is a lot like winning the lottery - the odds are slim. In other words, it's great if it happens, but don't count on it. Although you might be expecting to inherit a windfall, the best course of action is not to rely on money that you didn't work for. This way, you won't be disappointed if you don't get it. Besides, leaving your future in somebody else's hands usually isn't a good idea. It is far too easy for potential benefactors to change their minds, have a change of heart, leave their cash to charity or give their money to somebody else. (To see when it is better to not accept an inheritance, see Refusing An Inheritance.)

The Bottom Line
Instead of counting on money that may never arrive, a far better strategy is to use your current income to create a nest egg of your own. The first step in the process is to figure out how much money you will need to support yourself once you stop earning a paycheck. The next step is to develop a plan to save and invest in order to build the nest egg that your retirement will require. This strategy will enable you to enjoy the peace of mind that comes with achieving your goals on your own rather than relying on luck and fortune to pay your way.

To get started saving for your future, read Ten Tips For Achieving Financial Security, Saving For Retirement: The Quest For Success and Will Your Retirement Income Be Enough?

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