Will Inheritances Save the Baby Boomers? Unlikely

In my last blog I talked about the difficulty in planning for retirement given the number of unknowns, primarily future health, inflation and lifespan.  On a personal basis, we each must balance using our time and resources to enjoy life now with working and saving to make sure we have adequate resources when we are no longer working, whether due to retirement or ill health.

As a generation, however, baby boomers are notoriously poor savers.  Many will not have enough funds socked away for a comfortable retirement.  For those who remain healthy, continued work, whether full-time or part-time, may fill the gap.  Another possible way to fill the gap is inheritances from the baby boomers' more frugal parents.

Some economists have predicted a windfall of inheritances coming to baby boomers of as much as $10 trillion (in 1990 dollars).  A more recent report, published by the AARP Public Policy Institute, estimates that to date boomers have received total inheritances of approximately $2.8 trillion (in 2005 dollars).  While more is on its way, the report concludes "that inheritances, despite wishful thinking and optimistic projections, are not likely to bail out the boomers."

One of the reasons that what inheritances there are will do little to help the boomers most in need is that they are skewed towards those who already have money.  About 20 percent of boomers have received inheritances to date with a median value of $64,000, meaning that about 10 percent of boomers have received inheritances larger than this amount and 10 percent smaller than this amount -- not enough to secure their retirements.

Of those boomers who have received inheritances, 5 percent went to those in the lowest 20 percent (quintile) of net worth and almost 40 percent went to those in the highest quintile.  If we look at the dollar amount the inheritances, they are even more skewed towards those who are already comfortable.  Of those inheritances to boomers exceeding $100,000, 1 percent went to the lowest quintile and 64 percent went to the group of boomers in the highest quintile.

As the report states, "It does seem fair to say that the rich got richer in the sense that the wealthiest received the largest inheritances."

While we can debate what this means for public policy questions such as the estate tax, in terms of individual planning, it means that most boomers will have to save for their own retirements.  It's never too late to start.