If you are counting on an inheritance as a critical part of your financial plan, you’d better make sure your parents are on board with the same idea because chances are good that they aren’t.
A recent survey from HSBC Holdings, for example, found that nearly one pre-retiree in four would like to spend all of their savings before they shed their mortal coils. Their children can take care of themselves. Fewer than one retiree in ten stated they wanted to pass on as much wealth as possible to the next generation.
The survey found that, on average, U.S. retirees expected to pass on about $175,000, on average, to their children and grandchildren. Sure, this is a decent sum of money, but it is nowhere near enough to provide anything close to a secure retirement to a married couple that has spent their entire working years neglecting their own retirement saving and planning.
What’s more: Only 56 percent of American retirees surveyed expect to be leaving an inheritance at all.
Inheritance may be under pressure for a variety of reasons – and not just because older Americans simply want to blow the family wealth on Caribbean cruises and casino vacations.
Low interest rates have been good for younger generations who have been able to get cheap home loans but they have been very tough on older Americans. They have been earning razor thin returns on bank CDs and other forms of saving traditionally popular with risk-averse senior citizens for generations. Twenty years ago, retirees could earn 6-8 percent on CDs. Today, a 5-year CD pays an average yield of 1.66 percent.
So where a $1 million nest egg once generated $70,000 to $100,000 in income per year on minimal risk, the same portfolio now generates income of around $10,000 to $20,000 per year. The difference has to come from somewhere: Seniors are increasingly forced to spend down principal to live on – and that eventually drains inheritances.
Americans are living longer than ever before. One in three of today’s 65-year-old women can expect to live to age ninety. If two 65 year olds are married, there is an 18 percent chance that one of them will live until age 95.
If you don’t take charge of your own retirement, you may well be in the unhappy position of having to borrow money from your parent or parents to pay for a plane ticket to come to their 95th birthday party.
And you may have to take off work.
Long-term care costs
Increasing long term care costs including adult day care, assisted living facilities, skilled nursing facilities and hospice care are also eating up many older Americans’ nest eggs. According to the 2016 Genworth Cost of Care Survey, the cost of an assisted living facility has gone up to $43,539 per year, while a semi-private room in a long term care facility now costs $82,125 per year, on average, with many areas costing even more.
Medicaid will cover some of these costs, but only after almost all a family’s potential inheritance is used up. If the individual receiving benefits owns a home, state officials may put a lien on the home, reimbursing the state for benefits being paid on the beneficiary’s behalf before sales proceeds are released to heirs.
Many seniors have pledged their homes to lenders in exchange for income, essentially borrowing against the equity in their homes in reverse mortgage plans. In many cases, these reverse mortgages are necessary to provide needed income for older Americans to live on but when you inherit the estate, the home may well have to be sold to pay back the reverse mortgage loan. You may not get the inheritance you were planning on.
The responsible course of action is clear: Americans of all generations should take responsibility for their own retirement planning and security. If an inheritance comes it comes, but Americans should not be banking on it. Consuming your entire income is a dangerous plan. Act now to begin saving for your own future, and don’t rely on parental wealth to bail you out.