8 Reasons You Should Not Expect an Inheritance

You’ve probably heard about the bumper sticker, even if you haven’t seen it. It’s the one on Cadillacs in Florida and Lexuses in Arizona that says “I’m spending my children’s inheritance.”

Photoillustration by Tony Cenicola/The New York Times

Some transfers of wealth are made while the parents are alive, leaving little to pass down after death.

We’ve laughed at that for years. But the truth is, retirees have a lot of demands on their savings. Out-of-pocket health care costs, for one, are rising fast. At the same time, many people are not waiting until they die to help their children and grandchildren financially. And some are finding creative ways to draw on money that would otherwise be part of their estate.

For all these reasons and many more (I’ve ticked off eight below), it would be a bad idea to plan on getting any inheritance from your older relatives.

Many people have figured this out, though not all. An AARP analysis of the Federal Reserve Board’s 2004 Survey of Consumer Finances noted that 21 percent of people born after 1964 thought they would inherit some money someday. After all, most of them still have living parents or grandparents.

But with each passing year, the pressures on the nest eggs of those older people will only grow. The truly rich will be fine, as they usually are. But a lot of other people, even retirees with net worths well into the seven figures, could end up spending every dime before they die.

There is nothing wrong with that, by the way. This is a judgment-free column on that front. There is no moral obligation to leave a cent to the next generation. And there are some people who struggle each day to make ends meet who only wish they could leave an inheritance.

But for those who thought that they would have something to pass on, or that money would be coming to them, here are some of the things that may get in the way.

People who make it to 65 will live a lot longer. As of 2005, according to National Center for Health Statistics data, males aged 65 could expect to live to 82; for females, it was 85. That’s 37 years of living expenses for couples, and it isn’t easy or fun to scale back your standard of living.

Want to get a sense of how long you or your older relatives may live? Drop the phrase “How long will I live” into a search engine and play with some of the longevity questionnaires that pop up on the results page.

Social Security and Medicare will probably change. It’s hard to find anyone who thinks those programs will get much more generous. Medicare premiums will rise, and the program may cover fewer procedures or not cover emerging ones. Meanwhile, taxes on Social Security benefits may rise, and everyone may have to wait longer to collect.

Fewer people have pensions, so they’re more wedded to the markets. In 2005, according to the Employee Benefits Research Institute, 63 percent of workers in the private sector worked for employers who offered only 401(k) or similar plans, not traditional pensions.

As pensions continue to disappear, retirees and those close to the final quitting time will depend more heavily on how their investments perform. And as large numbers bet heavily on stocks to finance 20-plus years of retirement cruises and Cadillacs, some will inevitably lose big.

Out-of-pocket health care costs for retirees may soon hit seven figures a couple. Sounds crazy, right? Sure, these postretirement costs probably won’t get that high for people who have employer-provided retiree health insurance, though few in the private sector do anymore.

For those who don’t have such insurance and are retiring this year at age 65, the mutual fund giant Fidelity figures they will need $225,000 to cover their health care costs in retirement, though that doesn’t include over-the-counter drugs, dentistry or nursing home expenses.

For 55-year-old couples, the numbers could go much higher, according to projections by the Employee Benefit Research Institute. Once these people hit 65, if they pay all Medicare costs, purchase Medigap coverage beyond that and have prescription costs higher than 90 percent of their peers, they’ll need $1,064,000 in savings to finance these costs over the rest of their lives.

Divorced individuals may pass on less money. Splitting up can be expensive in itself, and maintaining two households for decades afterward will often cost more than sharing a dwelling.

Even if the parents have money left over, the ones who didn’t have custody of the children may be less inclined to pass an inheritance on to them. “The ties that parents have with kids and their interest in supporting them could well be weakened by the fact that they haven’t spent much time with them,” said Laurence J. Kotlikoff, an economics professor at Boston University and the co-author of “Spend ’Til the End,” which gives readers a new way to think about financial planning.

It’s getting easier to drain a home’s equity. Homeowners who are 62 or older (though there are some exceptions) can take out a reverse mortgage, which is roughly akin to a home equity loan that you don’t have to pay back until you (or your heirs) sell the house. So homeowners can tap the equity in their homes without having to make monthly payments to repay the debt.

So far, borrowers have taken out roughly 450,000 of these loans since 1990, according to the National Reverse Mortgage Lenders Association. But the pace is picking up. Lenders, including mainstream operations like Bank of America and Wells Fargo, wrote more than 100,000 of them for the first time in the year ended Sept. 30, 2007.

Meanwhile, the association says, retirees are increasingly using mortgages as a financial tool — and not simply as a last resort to pay for health care emergencies and the like.

Indeed, there is nothing to stop people from using the loan proceeds for vacations or cars or whatever they want. Millions just may do that someday, which makes reverse mortgages a real wild card. Their growth certainly raises the likelihood that large portions of family homesteads in America will end up belonging to banks, not heirs.

Life insurance may not offer much help. It’s now possible for people to sell their life insurance policies to investors in many circumstances. For a $1 million policy, an investor would pay some fraction of that immediately to the original policy holder, then hang on to the policy to collect the full amount when the seller dies. The more people who do this, the less money for any heirs.

Meanwhile, the popularity of term life insurance, where policy holders are covered for 10 or 20 years or so but then get nothing afterward if they don’t get a new policy, could also have an impact. Many people stop buying term life insurance after their children become adults or once a spouse dies. Their heirs will get nothing in the way of a payout.

The transfer of wealth will increasingly happen while the older generations are still alive. People in the latter halves of their lives now find themselves financing college tuition for grandchildren, chipping in when children or grandchildren graduate with five and six figures in student loan debt, supplying down payments in a tightening mortgage market and bailing the younger generations out of a host of other financial calamities.

Sometimes, this is part of a concerted effort to reduce an estate that could be subject to taxes. Other times, it’s pure necessity.

But it may well be everything you’ll ever get. If you put it to good use now, perhaps you won’t have to choose later between selling your life insurance and draining your home equity.