Does Inheritance Taper Retirement Uncertainty?

It’s commonly known that the nation has a substantial number of households considered at risk for an uncertain retirement. The Center for Retirement Research at Boston College (CRR) created a National Retirement Risk Index, which measures retirement preparedness and found that more than half of households may be unable to maintain their standard of living in retirement. 

Using the retirement index, CRR set out to investigate the effect, if any, of inheritances on retirement savings. Today’s working households stand to inherit substantial wealth, the center said in its recently released brief, “How Do Inheritances Affect the National Retirement Risk Index?” The question is, would it make a significant difference to Americans in retirement?

After a discussion and description of the index, the brief examines the inheritance questions in the Federal Reserve’s Survey of Consumer Finances to look at the relationship between inheritance and the retirement status of households in the index.

The central question is how many more households would be unprepared for retirement without any inheritance. To answer this, the CRR set out to eliminate inheritance numbers from the data, first by projecting the value of the inheritances received to age 65 and by calculating the annuity income at age 65 that is generated by inherited wealth.

The results from the CRR’s methodology, fully described in the brief, show that inheritance has but a modest effect on at-risk households. Households in the top and bottom thirds of the income distribution are less affected by taking away inheritances than those in the middle, according to the brief.

While those in the top third are the most likely to receive inheritances, they are also the least likely to rely on them for retirement preparedness because they can turn to many other financial resources. Those in the bottom third are less likely to receive any inheritance at all. Since those in the bottom third that do receive an inheritance are already at risk for retirement insecurity, the inheritance does little to reduce their at-risk status.

Middle-income households seem more reliant on inheritances for retirement security than those above, and are more likely than those below to actually receive one and rely on it for making the difference in retirement preparedness.

While inheritance barely moves the needle on retirement preparedness for the population as a whole, it does have a greater effect on the recipient population. Middle-income household retirement insecurity grew, from 42.6% to 50%, when the inheritance factor was eliminated, a 7.4 percentage point change.

CRR’s conclusion is that while inheritances improve the financial situation of households that do receive them, their impact on the overall retirement risk status of the population in the index is quite modest. The result holds true both when removing inheritances from households that have received them and when expanding the number of households that might receive them in the future.

When inheritances are removed, the modest impact is based on the fact that few households are affected, since only about one-fifth of households have actually received one. Then, too, those that do receive an inheritance reap a relatively small amount compared with the total retirement income needs of the household. Most households receiving an inheritance were already well above the index’s “at risk” cutoff, so removing the inheritance is not enough to put them at risk.

In the case of increasing inheritances in the future, the effect is modest because only one-fifth of households receive them; the amounts are relatively small; and many of the additional households assigned an inheritance were already “not at risk” for retirement, so giving them more money obviously does not affect that status.

The bottom line, according to the report’s conclusion, is that, while anything that boosts households’ assets is beneficial, inheritances are unlikely to play a significant role in changing retirement readiness.

“How Do Inheritances Affect the National Retirement Risk Index?” can be accessed from CRR’s website.