Don't Rely on a Large Inheritance

Have you heard about “the great wealth transfer? It is a term used by the media regarding the expected shift of assets from the baby boomer generation to their children over the next 25+ years when the baby boomers pass away. Analysts forecast that parents will bequeath trillions of dollars in wealth to their children. But will some of that fortune actually land in their children’s bank accounts? Maybe, but maybe not…

New clients sometimes mention they expect to receive an inheritance, either from a parent or another family member. I always caution them to recognize that may NOT happen. According to recent surveys, over half of young adults believe they will receive an inheritance, but most never do. In fact, less than 22% actually received property or other funds via inheritance, or the amount inherited is often far less than expected. A 2020 Federal Reserve study found that the average inheritance = $46,200, but this figure was inflated by legacies passed down in wealthy families. Yet one third of Americans believe their financial stability depends on a future inheritance.

The focus of our sound financial planning is to achieve independence and stability based on the client's own savings and other assets. Including a potential inheritance is not prudent as this can lead to unrealistic expectations. In planning with my clients, I assume no inheritance is forthcoming, and consider an inheritance an unexpected bonus

So why is there a disconnect about potential $$ passing down to the next generation? Below are a few of the reasons:

· Older Americans are living longer than previous generations, reducing how much they can leave behind despite accumulated wealth and home equity. The average life expectancy in 2023 was 82.2 years for American women and 77.0 years for men. There is a good chance your parents will live much longer than that because of medical advances that could extend their lives. The number of Americans who are 95 and older grew 48.6% from 2010 to 2020, according to the 2020 Census. For a 65-year-old couple, there’s a 50% chance that one spouse will live to age 93 and a 25% chance that one will live to 97, according to the Society of Actuaries.

· Medical expenses could reduce the amount of money you’ll receive when your parents die. Economists estimate that in coming years, seniors will spend an average of about $122,000 on medical care from age 70 through the remainder of their life. Average costs for cancer treatment run in the $150,000 range, according to the AARP.

· About 70% of people aged 65+ will need some kind of long-term care in their lifetime; 20% will require care for more than five years, according to the National Center for Health Statistics. The median cost of a semi-private room in a nursing home = $7,908 a month, according to Genworth’s Cost of Care survey. Hiring a home health aide for 44 hours per

week year-round costs an average of $ $61,776. Another study found that in the last five years of life, the cost of caring for a person with dementia averages more than $415,000. Without long-term care insurance, seniors may be forced to spend most or all of their savings for assisted living if they need help with daily tasks, such as meal preparation and bathing. Note they cannot qualify for Medicaid unless they have $2,000 or less in assets (excluding the family home and car).

· Many other factors impact the size of a potential inheritance: inflation, stock market volatility, mismanagement of assets and fraud. Cognitive decline is a significant risk as people age, and elderly individuals are vulnerable to financial scams. Many baby boomer parents have spent significant $ taking care of their own elderly parents,

· When your parent passes away, the executor of the estate must pay all outstanding taxes and debts before distributing assets to heirs. The executor may also have to pay funeral expenses, along with attorney fees and estate administration fees. Depending on your state, you may have to pay inheritance taxes.

· If you inherit a parent’s traditional IRA, 401(k) plan or 403(b) plan, you must pay income taxes on withdrawals, significantly reducing the size of the account. Since the passage of the SECURE Act in 2020, non-spouse heirs now must withdraw all funds within 10 years of the original owner’s death, accelerating the withdrawals and increasing the annual income taxes for heirs.

· Millions of parents lost their homes and all or most of their savings about 15 years ago in the Great Recession. Many are now entering retirement with a much smaller nest egg than intended. Some lost high-level jobs and had to move to lower-paying positions. Others also lost pensions and health care benefits, limiting future retirement income especially since Social Security was never intended to cover all expenses in retirement.

· Parents who have worked hard to earn their own wealth might feel that their children should do the same. They choose to leave their wealth to charity instead of their children.

The bottom line: Do not expect an inheritance to solve your financial problems. Live within your means. Sound and responsible financial planning should ensure the essentials are covered: living expenses, health care, childcare, emergency savings, and retirement. Then IF an inheritance is received, your plan can be modified to pay for college tuition, medical bills, more retirement savings, and hopefully a few of your bucket list” dreams.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.