Boomers' big inheritance: Is it enough?

The coming cycle of inheritances is billed as the greatest wealth transfer in US history. But don't expect it to finance the retirement of baby boomers or their children.

The reality, according to one new survey, is that when people do receive an inheritance, it's typically well under $100,000. And most people will receive no inheritance at all.

It's true that US households are richer than ever. Thanks largely to a boom in home prices, net worth has been rising for families across the income spectrum.

But even as the pool of wealth has risen, the cost of retirement has been rising. Longer life spans, coupled with the rising cost of medical care, mean that many older Americans will use their wealth rather than pass it on to children.

"In many cases, because of increasing longevity ... it goes the other way.

Instead of inheriting wealth the children wind up having to spend considerable wealth taking care of their parents," says Zvi Bodie, an expert on personal finance at Boston University.

This doesn't mean inheritances are a thing of the past. But it does amplify the notion that today's working Americans need to focus on saving for their own retirements – even as they also devote resources to caring for their parents and their own children.

The inheritance factor is just one reason. For years, corporations have been shifting from promising a guaranteed pension toward offering 401(k)s that are largely do-it-yourself savings plans.

And government programs for older Americans – Social Security and Medicare – could soon face some belt-tightening.

Last week, Federal Reserve Chairman Ben Bernanke issued a blunt warning to Congress that the burgeoning costs of these entitlement programs, if untamed, could harm the US economy. Any "fixes" that evolve may not be dramatic, but benefits could become a bit less generous in the process. The eligibility age for Social Security could rise, for example.

Given all this, perhaps it's not surprising that only one-third of adult Americans feel confident about being financially ready for retirement, according to the results of a nationwide poll just released by Putnam Investments in Boston.

"It's true that there will be trillions of dollars transferred" among generations, says Beth Segers, director of market planning for Putnam. But "we cannot count on inheritance as the panacea to address the inadequate discipline of saving."

There is a good-news element to the story, she says. People are living longer lives, and younger generations are showing a strong propensity to care for their family members. The tough part, simply, is that this often involves financial strain.

"Boomers are often kind of dismissed as the 'Me Generation,' " Ms. Segers says. "What we find is that people are putting their families first."

Among the survey's findings:

•Only 24 percent of adult Americans expect to get an inheritance. And of those adults who have received an inheritance, the median amount received is $37,700.

•For working Americans over age 45 who have living parents, half are providing some assistance to their parents. Often it's nonfinancial – helping with chores and the like. But just as often these boomer kids are spending money on their parents.

•For workers over 45 who have grown children (over 25), one-fourth have a child living at home with them, and even more are providing financial support to those children – something most of them didn't expect to do.

The consequence: Less money is piling up in retirement funds than many workers wish.

Last year, only 31 percent of workers between ages 45 and 54 had more than $100,000 in retirement savings, according to the Employee Benefit Research Institute in Washington. An equal number had less than $10,000 saved.

This savings shortfall has gotten a good bit of media attention in recent years. But other news articles have drawn attention to a large pool of wealth that is expected to pass from older Americans – especially the World War II generation, to their offspring.

As far back as 1990, Fortune magazine talked about "the biggest intergenerational transfer of wealth in US history," in which middle-class Americans will "for the first time, inherit significant assets en masse."

By 1999, the Boston College Social Welfare Research Institute had estimated an eye-popping total: that a wealth transfer of more than $41 trillion will occur by 2052.

Such reports have never promised that everyone will get an inheritance, let alone a large amount. And the $41 trillion estimate has sometimes been misunderstood as the amount that baby boomers alone will receive.

Actually, that total encompasses them and many of their children, and much of the money will be used to pay estate taxes or charitable donations.

Moreover, America's wealth is concentrated heavily among the richest families.

"Only about 20 percent of households receive inheritances of any note," says Edward Wolff, a New York University economist who studies the distribution of wealth. "It may rise over time," he says, but "it's still going to be a minority of households."

On that score, the Putnam survey suggests that Americans may be doing pretty well at keeping their expectations in check. Just 24 percent of adults in the survey expect an inheritance, and relatively few expect it to make a big difference in their retirement.

Last year, an analysis done for AARP confirmed that, so far at least, boomers haven't reaped a mass windfall. Of those who have already received inheritances, the median amount as of 2004 totaled $64,000, according to the study, which drew on Federal Reserve data.

Such backward-looking studies and polls, aren't a firm guide to the future. The number and size of inheritances may grow and broaden over time. But experts still caution that most people can't expect a windfall.

So what's the best course for baby boomers and other working-age Americans?

Among the main options: Focus harder on saving now, and prepare to work more later in life. Save in your 401(k) or an IRA account where taxes can be deferred, says Dr. Wolff.

Dr. Bodie, the Boston University economist, says people need to better manage their "human capital" – upgrading your employable skills – which typically outweighs their financial assets.

"Work is an asset throughout your lifetime," he says. And increasingly, work will extend into retirements that are a mix of work and leisure. "Retirement is not going to be a date, it's going to be a process."