Do Inheritances Affect Retirement Savings?
Substantial wealth will be transferred over the coming years will benefiting a large percentage of modern day working-age households, but the future isn’t clear on how these inheritances will affect retirement savings.
A recent study from Boston College explored how receiving an inheritance could lower the percentage of households at risk for running out of savings during their drawdown years.
What the study found was that inheritances do not significantly affect the retirement security of the population at large. The majority of households that inherit money are either already on track to proper retirement savings or aren’t going to inherit enough to make much of a difference.
This study used the National Retirement Risk Index—based on the Fed’s survey of consumer finances. This index measures retirement preparedness in American households throughout the acquisition years. The study found that 52% of working households in 2013 risked facing reduced consumption levels after retirement.
So let’s see how inheritance affects this picture:
The study found that 23.6% of high-income households, 18.5% of middle-income families, and 14.4% of low-income families received an inheritance.
Median inheritances of combined house and financial assets had appreciated to $87,500 from $50,000 in the year received.
Families within each income category that received an inheritance were much less likely to be at risk than the families who hadn’t. The risk for all families fell from 54.2% (without inheritance) to 40.4% (with inheritance).
The study then explored how much higher this index would be if no one had received an inheritance. Researchers found that the percentage of those that were at risk would have increased just slightly—the index would rise to 52.4% from the current level of 51.6%.
The effect of removing inheritances would vary based on income level. The top 30% of households—the most likely to receive inheritances—are less reliant on them during the draw down period of a client’s life, thanks to the access to other financial resources that these families have.
The bottom 30% are less likely to receive inheritance funds—those that do are likely to be at risk, and the inheritance wouldn’t help much.
Middle-class families, however, are more reliant on inheritances to ensure retirement security than the high net worth families, and likelier than lower income earners to receive an inheritance. This group is also more likely to rely on it as a nest egg in preparing for retirement.
Eliminating inheritances from this index, the percentage of all income groups that are at risk during retirement rises 4 points. The largest effect is seen on the middle class—experiencing a 7% increase.
What this breaks down to is while inheritance is important to families that receive them (just like any acquisition of financial assets), they barely influence retirement preparation for the populace as a whole.