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Should Inheritance Be A Retirement Strategy?

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Dr. Lunceford is a Senior Vice President and Wealth Advisor at Mesirow Financial.

Planning for retirement requires a road map that is unique to each individual. The expectation of guaranteed income from employer-sponsored pension plans or public safety nets is dwindling away. Individuals fortunate enough to have benefits from guaranteed programs may still have concerns about increased costs such as health insurance, food and housing.

Our longer life spans may also create concerns about how to manage our retirement nest eggs and expenses for a longer time period. These factors combined with the changing household structures, which include more single retirees or blended families, can also limit retirement resources. In times like these, it is not uncommon to hear people say, “I need an inheritance.”

Waiting to inherit assets is not a good strategy, especially when the grantor has the ability to change beneficiaries or get married at any time. The funds you are anticipating can easily go to a different family member, charity or new spouse without your knowledge, consideration or consent. If you are fortunate enough to receive an inheritance, there may be factors that cause you to fall short of your retirement need. This leads to the question, what are reasonable expectations for a potential beneficiary to have?

In the past decade, record wealth has been created in the capital markets, private businesses and real estate. Many watched their nest eggs grow beyond what is required for their lifestyle. This has many individuals deciding what should happen to their wealth upon death. It is estimated that the Silent Generation, defined as individuals born between 1928 and 1945, and baby boomers, defined as individuals born between 1946 and 1964, will transfer $30 trillion to $68 trillion upon their death.

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Those born into the Silent Generation and baby boomer cohorts may be among the last individuals to benefit from guaranteed monthly income from pension plans large enough to cover their expenses in retirement. Individuals in the Silent Generation have benefited most; however, approximately 13% of baby boomers are still included in defined benefit plans. Several of these pension recipients have been positioned to save money in retirement, as well as recognize growth in their home values and other investments.

The large amount of potential inherited wealth has made many family members more optimistic about inheriting wealth. Although a record level of wealth has been created, family members of those with financial means should not assume they will be the beneficiaries of wealth. According to a 2021 survey, 75% of baby boomers are focused on living well today and less interested in planning for an inheritance. There are several factors that contribute to this view.

First, receiving wealth through inheritance can make heirs less ambitious and limit their potential. Second, many potential grantors feel their children and family members may not share their values and may not have an appreciation for the sacrifices that were made to achieve wealth. Third, many potential grantors feel at least part of their estate may better benefit a charity or the less fortunate.

If you are thinking about inheritance as a retirement strategy, here are a few additional facts you should consider. According to data from the Federal Reserve, the average inheritance in the U.S., between 2016 and 2019, was $46,200. Although one could argue any number greater that $0 is better than nothing, $46,200 will make a marginal difference in the average retiree’s lifestyle.

Inheritances received from college educated parents during the same period averaged $92,700 and were also not enough to solely support an individual in retirement. Six figure or greater dollar amount inheritances appear to be limited to the wealthiest 1% of families. Individuals who are not associated with such wealth should expect an inheritance that will at best supplement their other income.

If you are fortunate enough to receive an inheritance, what comes afterward?

Here is what you can expect if you benefit from an estate. When a person dies, there can be two types of taxes: estate taxes and/or inheritance taxes. Estate taxes are paid by the estate before an inheritance is distributed to beneficiaries. Inheritance taxes differ and may be assessed to the person receiving an inheritance.

At the federal level, estates over $12.06 million may be subject to the estate tax. Although the federal government does not have an inheritance tax, there are states where they exist. Currently, Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania have inheritance taxes. Spouses are exempt from paying inheritance taxes in each of these states. With the exception of Pennsylvania and Nebraska, children and grandchildren are exempt from paying inheritance taxes.

What are the best practices?

According to a study, adults who received an inheritance saved approximately 50%, and spent, donated or lost the remainder. Also, nearly 20% of baby boomers who received $100,000 or more spent the entire amount. If you think you will be receiving an inheritance, here are a few tips to consider:

• Establish financial goals and boundaries before receiving your gift so you do not overspend on items that are not likely to appreciate in the future.

• Prioritize your spending needs and prepare to say no to friends and family members who express a need for your inherited assets.

• Retire high interest debt.

• Confirm you do not have a tax liability before spending or gifting funds.

• Establish a long-term financial plan that considers your lifetime needs. Consult a trusted financial advisor such as a certified financial planner or accountant if you need professional advice.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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