inheritance

The Effects of Inheritances on Retirement Risk

Negligible nationally

The impact of inheritances on retirement risk figures nationally is fairly modest, according to a recent report released by The Center For Retirement Research at Boston College. The researchers found that taking all inheritances away from families that are expecting them would reduce the National Retirement Risk Index (NRRI) by less than one percentage point. The NRRI measures the percentage of working-age households who are at risk of being unable to afford to maintain their accustomed style of living into retirement, be it because of poor planning, failing health or reliance on government assistance that may not be forthcoming. The current NRRI shows 52 percent of households are “at risk.” As such, a one percentage point shift isn’t exactly a sea change.

The report sums up these findings nicely, noting: "The bottom line is that, while anything that boosts households’ assets is beneficial to their financial situation, inheritances are not likely to be decisive in determining retirement preparedness for many households."

The study lists several reasons behind this surprisingly modest impact. The first is that we’re dealing with a national figure and the number of households nationwide who would receive an inheritance in the first place is quite low, so removing all inheritances only affects a small percentage of potential retirees. Further, even among those few who are set to receive an inheritance, the typical amount realized is quite small, so it’s unlikely to represent life-changing money either way.

Finally, those lucky few who are actually set to receive a large inheritance are also generally among the most well-prepared for retirement (or are already quite wealthy). So, even though this group would seem to suffer the greatest financial impact in terms of sheer dollars involved, they generally have strong enough retirement plans in place (or enough wealth on hand) to weather the storm of losing a substantial inheritance without putting themselves “at risk.”

Let it all be doom and gloom, the report does note that inheritances could become more prevalent in the near future, both in terms of frequency and size, due to unspent 401(k) balances. It also concedes that if the study’s scope were reduced to measure the potential risk only to those households who are anticipating an inheritance, the impact would be more substantial. 

“On the one hand, past research has shown that higher-income households – who are less likely to be unprepared for retirement – are more likely to receive inheritances and to receive larger amounts than their lower-income counterparts. On the other hand, the anticipated inheritance receipts of low- and middle-income households represent a much larger percentage of their current wealth, suggesting that inheritances could potentially be more influential in boosting their retirement security.”

Just because inheritances may not move the needle much on a national scale doesn’t mean advisors can treat them as unimportant. Every client requires a unique approach, even if, in general, an inheritance may be unlikely to “make or break” a retirement plan.

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