Many adult children expect to receive an inheritance from their parents. Recent studies suggest a drastically different scenario. Not only will most retirees not leave an inheritance to their children, they will have a difficult time making ends meet in retirement. Here are several reasons why expecting an inheritance might not be in your future.
Parents are Living Longer and Saving Less
Americans are living longer, healthier lives but this is not shared universally. One in four Americans suffer from chronic illness or poverty and this can drastically alter quality of life during retirement years. As most of us age we have additional expenses such as increased medical costs, increasing insurance premiums, and long-term care costs. Living longer can also put added stress on retirement funds. The National Institute on Retirement Security recently published research that puts the U.S. retirement savings deficit at between $6.8 and $14 Trillion. One dire finding of the research is that the average American household has virtually no retirement savings at all. While average 401k balances for those 55 plus reached $255,000, the picture changes drastically when looking at all working-age households. The median retirement account balance for working-age households is $3,000 and $12,000 for those close to retirement.
Health Care Costs Continue to Increase
Health Care costs are expected to increase by 6.5% in 2014 according to PWC’s Health Research Institute and this is after a 7.5% increase expected in 2013. In an effort to shift health care costs to employees, many employers are increasing premiums and deductibles. Nearly 17% of surveyed employers offer a high deductible health plan as the only option for employees and 44% of employers are looking at high deductible plans as an only option. Since 2009, health industry consolidation has increased by more than 50% and this will lead to higher prices in many markets. In fact, hospital mergers can lead to price increases of up to 20.3%.
Home Equity is Down and Mortgage Debt is Up
In 1989, 26.4% of households had mortgage debt in retirement while 46.7% of all U.S. households in 2007 carried a mortgage into retirement. The average American carries more than $80,000 at retirement age and never pays off their mortgage. In addition to mortgage debt many future retirees have tapped home equity to pay expenses. Moody’s Investor Services is warning that lenders may face steep losses when home owners with HELOC loans will see monthly payments rise 26% when principle is due on loans. Up until now, many HELOC loans only require interest payments for the first 10 years, after that payments must include principle and interest.
Leaving Money to Kids is No Longer a Priority for Many Parents
In a recent study, Allianz Life found that in 2005 22% of retirees aged 72+ felt that leaving an inheritance to family was a priority compared to 14% today. Interestingly only 9% of boomers aged 47-66 expect to receive an inheritance.
Pensions are a Thing of the Past
According to the GAO many companies that offered pensions in the past are no longer doing so. More than half of all private pensions in the U.S. are either closed to new employees or frozen (employees keep accrued benefits but do not earn additional benefits). Another disturbing trend is the willingness of many retirees to take a lump sum payout from their company pension plan even with the knowledge that up to $57,500 in retirement income is insured by the PBGC. One popular strategy is to use the lump-sum payout to purchase an annuity. This is not a good idea as most annuities will end up reducing your monthly benefit by 10% or more.