Baby boomers have accumulated significant wealth, in terms of both their home equity and their retirement savings. But their children may be disappointed in the size of their inheritance—if they even get one.
A 2020 Federal Reserve analysis found that the average inheritance was $46,200. And even that figure was inflated by legacies passed down in wealthy families, the Fed said. If you’re depending on an inheritance to make up for what you haven’t saved for retirement, think again.
One reason your parents may leave a smaller inheritance than you expect is that their generation is living longer than previous ones. The number of Americans who are 95 and older grew 48.6 percent from 2010 to 2020, according to the 2020 Census. For a 65-year-old couple, there’s a 50 percent chance that one spouse will live to age 93 and a 25 percent chance that one will live to 97, according to the Society of Actuaries.
Medical expenses and long-term-care costs could also reduce the amount of money you’ll receive when your parents die. For example, the average cost of a semi-private room in a nursing home is $7,500 a month, according to Genworth’s Cost of Care survey.
Even if your parents don’t require nursing home care, other factors could reduce the size of their nest egg, says Bill Schretter, a certified financial planner with Allworth Financial. “People’s assets at 60 can be greatly reduced by the time they’re 85,” he says. “Inflation, the stock market going up and down, and even mismanagement of their finances can lead to parents having less money to leave their children.”
Fraud losses are another concern. As individuals age, they’re increasingly at risk for cognitive decline, which makes them more vulnerable to scams, Schretter says. Older Americans lose more than $28 billion a year because of fraud, according to AARP.
And don’t forget debts and taxes. When your parents die, the executor of the estate must pay all outstanding taxes and debts before distributing assets to heirs. The executor may also have to pay funeral expenses, along with attorney fees and other costs associated with managing the estate.
After the estate’s debts are paid, you may have to pay state inheritance taxes, depending on where you live. In contrast to an estate tax, which is paid by the estate, heirs are responsible for paying inheritance taxes.
In addition, if you inherit a parent’s traditional individual retirement account (IRA) or 401(k) plan, you’ll be required to pay taxes on withdrawals, which could significantly reduce the size of the account. Following legislation passed in 2019, non-spouse heirs must withdraw all of the funds from these accounts within 10 years of the original owner’s death.
