Many adult children are ignoring the old adage "don't count your chickens before they hatch," and conducting their finances based on an inheritance they may not receive, a recent survey suggests.
Nearly 3 in 5 adult children are building long-term financial plans around family money they're assuming they'll inherit, life insurance seller Ethos said after surveying in September 507 adults who expect to receive a meaningful inheritance and 513 parents who expect to leave one. Five percent have already spent or borrowed against an inheritance that hasn't arrived yet, with about 1 in 14 saying they've taken on or carried more debt because they expect a windfall, Ethos said. Nearly 1 in 10 heirs also said they've saved less for retirement because they were
counting on an inheritance to keep them afloat in old age.
While it's great to be optimistic, financial advisers said this could spectacularly backfire.
"Kids are not saving like their parents were," said Patrick Simasko, elder law attorney and financial adviser at Simasko Law. "They spend their money now because they're relying on mom and dad to fund their retirement" with an inheritance.
The Great Wealth Transfer or the Great Disappointment?
Baby boomers are sitting on a pile of wealth, and some researchers estimate they'll have to pass about $124 trillion of that in what's dubbed the "Great Wealth Transfer" to next generations through 2048.
Others, though, warn potential heirs not to get their hopes up. A July report from Visa Business and Economic Insights puts the wealth transfer at a more modest $93 trillion. That's still a hefty sum, but after subtracting items like retirement expenses, taxes and leftover boomer debt, everyday heirs are likely to receive much less than that at around $36 trillion, or roughly $515,000 per inheriting household, over the next 20 years.
Despite holding significant wealth, boomers hold a lot of debt. Though the share of boomers holding debt may not be as high as other generations, the ones who do have debt, have a lot in certain categories. Some 57% still have mortgage debt, averaging $196,227, while 19.5% have a home equity line of credit, the highest share of any generation, according to an analysis last month by financial rankings platform BestBrokers of U.S. Census Bureau and Experian data. Some 64.3% of boomers also carry an auto loan, with an average balance of $22,583, up 2.35% year over year, it said.
Boomers also hold other consumer debt such as credit cards, borrowing against brokerage accounts and other investment portfolios, plus various personal and business loans, Visa said. "Taken together, the high share of cost-burdened older homeowners and substantial non-mortgage debt indicate that many baby boomers have far less financial flexibility – and potentially less wealth to pass on – than headline figures might suggest," it said.
The inheritance everyday heirs will receive shrinks further after accounting for the fact most of the wealth transfer will stay within wealthy families, it said.
Even without all those calculations, advisers warned that older Americans are living longer and health care is getting more expensive.
"Longer lives are good news, but they can mean care costs last longer and savings get drawn down further," Ethos said. "The typical adult child in our survey expects to inherit around age 55, yet 58% of parents expect late-life costs to cut what they leave by half or more."
Don't bank on the inheritance
Rather than rely on an inheritance to stay afloat during retirement, advisers said younger generations need to rely on their own budgeting to guarantee a comfortable future.
"Retirement is best funded by things you control, like your own savings and income," Ethos said.
People should keep expenses as low as possible, contribute money to 401(k)s, at least to receive any employer matches, or IRAs, advisers said. They should also make sure the money is invested to maximize returns over time, they said.
"The new normal is prioritizing spending money now – on kids, cars, college, houses so everyone can have their own bedroom, TV," Simasko said. "Everyone wants to keep up with Joneses. It's bad because they're spending their money now on hopes of inheriting money, but that's risky. I knew a nice lady with $300,000 in the bank. She was swindled and didn't have money then for assisted living so, the son's figuring out how to pay it. Anything can happen."
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
This article originally appeared on USA TODAY: Adult kids are spending future inheritances and risking a major trap
