A dangerous misconception about inheritances has gripped the Millennial generation. It threatens to imperil the future of many young people. Over half of young adults (53%) believe they will receive an inheritance, according to a recent Charles Schwab survey (opens in new tab). However, most of those who believe they will inherit money or property never do. Between 1989 and 2007, only 21% of those who expected an inheritance actually received one, the survey showed.
Clearly, relying on an inheritance is not sound financial planning.
A responsible financial plan should be built around the assumption that no inheritance is forthcoming. It must take care of the essentials we all need: living costs, health care, childcare, emergency savings and retirement. Then, if an inheritance is received, it can be added into the existing plan, helping to tackle challenging costs, such as college tuition, medical bills and saving for retirement.
Living on the edge
Economists and politicians have expressed dire concerns about the financial status of the majority of Americans. They cite a stark statistic: 60% households don't have enough savings to deal with a $1,000 emergency (opens in new tab), according to a 2019 Bankrate survey. When money is this tight and the future remains uncertain, it can be tempting to fall into wishful thinking, such as relying on a future bailout from an inheritance.
The bottom line: While younger people are struggling to get past living paycheck to paycheck, older people and retirees are struggling to afford health care and retirement. Several factors force many of them to spend down their nest eggs considerably, often to nothing.
The economic forces that make leaving an inheritance difficult
Even seniors who retire with substantial assets often end up with little savings due to myriad factors, including medical bills, long-term care, market fluctuations, debt and the expenses tied to simply living longer.
Medicare provides an invaluable benefit to seniors, but it doesn't cover everything. (See 7 Things Medicare Doesn’t Cover.) Seniors still have out-of-pocket costs with Medicare, and many opt to purchase Medicare supplement plans to get access to broader coverage. Also, Medicare does not cover many needed treatments for long-term medical conditions.
Every added expense can eat into the savings accounts of retired people on fixed incomes. Economists estimate that in coming years, seniors will spend an average of about $122,000 on medical care (opens in new tab) from age 70 through the remainder of their life.
The average monthly cost for long-term care (opens in new tab) in the United States is $7,698 for a private nursing home room and $3,628 for a one-bedroom apartment in an assisted living facility. For those who qualify, Medicaid pays most of their nursing home costs (opens in new tab). However, the program is not required to pay for assisted living. States get to pick and choose which long-term care services (if any) they will cover.
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. In addition, they can't qualify for Medicaid unless they have $2,000 or less in assets (excluding the family home and car). Often, seniors go into a nursing home and have to spend down their savings to below $2,000 before qualifying for Medicaid. As a result, many people who go into a nursing home end up with severely depleted assets.
Longevity is also a factor. When people live longer, it becomes more likely that retirees will find that their income is not enough to cover everyday expenses, forcing them to draw down their nest eggs. Also, greater longevity often comes with additional expenses, such as in-home caretakers or admission to a nursing home.
You may have seen Tom Selleck on television explaining the benefits of a reverse mortgage. For many seniors, reverse mortgages become a lifeline. A reverse mortgage allows them to tap the value in their homes when they need it. Though this may provide vital financial help, it also means that, when the senior leaves the home, the loan must be repaid.
The specter of the Great Recession
Many younger people may not have been in the workforce yet when the Great Recession struck in 2007, but their parents were. Millions lost their homes and all of their savings. The Great Recession was particularly hard on older workers. As a result, many are now entering or will enter retirement in the future with a lot smaller nest egg than intended.
In addition, many older workers lost high-level jobs during the recession and had to finish their careers in lower-paying positions. Others also lost pensions and health care benefits, limiting future retirement income. The average Social Security benefit in 2019 was $17,532. Retirees with little savings may deplete all of it to cover the difference between Social Security and their expenses.
The bottom line
One in three Americans believe their financial stability depends on a future inheritance (opens in new tab), yet many seniors will have little or nothing left to leave behind. A well-constructed financial plan seeks to achieve independence and stability based on the client's savings and other assets, treating any inheritance received as an unexpected bonus.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through SFG Wealth Management, a registered investment advisor. SFG Wealth Management and Synergy Financial Group are separate entities from LPL Financial.
Joseph C. Conroy is a CERTIFIED FINANCIAL PLANNER™ professional who is passionate about helping his clients pursue their goals. He founded Harford Retirement Planners (opens in new tab) to provide objective advice and knowledge to his clients. By partnering with an independent broker dealer, it allows Joe to sit on the same side of the table as his clients. It is this experience, working with many individuals over the years from many backgrounds, which inspired Joe to write the book "Decades & Decisions."
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