A new study from Ameriprise Financial suggests that Baby Boomer kids’ inheritance expectations are probably inflated. This is despite the fact that, according to a study from Accenture, over the next three to four decades an estimated $30 trillion in wealth is expected to change generational hands.

Boomer Kids’ Inheritance Expectations Fall Short of Reality

According to the Ameriprise Family Wealth Checkup study, 83% of older Americans say they want to leave money or assets to their loved ones. Only 64%, however, feel that they’re on track to do so. One reason? Just 50% of boomers have a specific plan in place for transferring wealth.

As far as how the transfer of wealth is being discussed, the study shows that among older Americans who plan to leave an inheritance, just 21% of parents have told their children how much money they will receive. The result is that 53% of children included in the study said they expected to inherit more than $100,000. However, 52% of those who had already received an inheritance got less than $100,000. (For more, see Leaving Inheritance to Children Easier Said Than Done.) 

What accounts for the gap between expectations and reality? There are several possible explanations. First, consider how much older Americans have saved for retirement. According to a recent PwC survey, roughly 50% of boomers have a nest egg of less than $100,000. 

Social Security can help to reduce the pressure to draw down savings in retirement, but it’s not necessarily a huge payday. As of January 2017 the maximum retirement benefit payable from Social Security for a worker at normal retirement age was $2,687 per month. The average monthly benefit across all retirees was just $1,360. That makes it more likely that retirees will have to tap their retirement savings to cover their expenses, leaving less wealth to transfer to future generations. 

Speaking of expenses, housing eats up the largest share of retirees’ income. According to the U.S. Bureau of Labor Statistics, the average 55- to 64-year-old spends a mean of $18,006, or 32% of his or her annual household income, on housing, with that percentage climbing to 36.5% at age 75 and up. Health care also puts a pinch on retiree budgets. Fidelity Investments estimates that the average 65-year-old couple spends $260,000 on health care in retirement, not including another $130,000 for long-term care. 

In that context it’s relatively easy to see why there’s such a difference between what younger adults think they’ll inherit and what they actually get. Boomers on average have less money saved than they need for retirement, and those funds have to stretch further as expenses increase. (For more, see 5 Ways to Stretch Your Retirement Budget.)

Planning for a Legacy of Wealth

For older Americans who are interested in sharing the wealth with their children or grandchildren, planning is of the utmost importance. Starting a discussion about what children will or won’t inherit early on can avoid conflicts down the line; it also ameliorates discord in the case of a sudden tragedy forcing the dialogue. 

Next up is formulating your estate plan. Depending on your net worth, how many children you have and the type of assets you’ll be leaving behind, this may include drafting a will, establishing a trust and choosing executors or trustees. You should also be thinking about who your beneficiaries will be for things such as retirement accounts and life insurance, as well as the tax implications of passing on wealth.

A financial advisor can help with drafting your estate plan, but if you opt to do it yourself, it’s important that you include family members in the discussion. They should also be aware of where key documents relating to your estate plan are located.

In terms of creating more wealth to transfer, how you approach it ultimately depends on things such as your age, income, health status and expenses. Increasing contributions to qualified retirement plans or supplementing your savings with a health savings account, for example, can be helpful for increasing your asset base. Paying down debt and streamlining your expenses can reduce the financial drain on those assets. Purchasing long-term care insurance can keep you from having to drain your savings to pay for health care later.

The Bottom Line

Leaving an inheritance isn’t a requirement, and it may not be feasible for every retiree. If you’d like to be able to hand on something to your heirs, first make sure that doing so won’t compromise your retirement outlook. If you’re sure you’ll still be able to retire comfortably, then you can move on to getting the estate planning conversation started with your adult children.

And if you're an adult child making your own financial plans expecting that an inheritance will factor in at some point, be aware that this might not come to pass as you had thought. Safest is seeing an inheritance as a windfall, not a pillar of your own financial planning.  

 

 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.