Inheriting Retirement Security

How Inheritances Help Households Afford Retirement
November 19, 201912 Min Read
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Contents
Executive Summary
  • Executive Summary
  • Findings
  • Conclusion
  • About the Authors

Executive Summary

Retirees are expected to transfer $36.2 trillion to their families, charities, and other beneficiaries over the next 30 years. (Havens, John J. and Paul G. Schervish. “A Golden Age of Philanthropy Still Beckons: National Wealth Transfer and Potential for Philanthropy” (2014). Center on Wealth and Philanthropy Boston College. Our estimate uses Havens and Schervish’s 2% growth, $5M exemption, recession-adjusted scenario, adjusted on a linear basis to represent a 2020-2049 time span.) But, little is known about who will be receiving that wealth or when they are likely to receive it. To begin to assess those questions, we analyzed data from the Federal Reserve on inheritances provided by the Silent Generation (born before 1945) to the Baby Boomers (born between 1946-1964) over the past 30 years, finding:

The total value of inheritances per year has risen by 119 percent over the past three decades, from $195 billion in 1989 to $427 billion in 2016, once adjusted for inflation. (Inheritance per year is calculated by taking the total inheritance received in the trailing 8-12 years in the Federal Reserve’s Survey of Consumer Finances, then dividing it by the number of years captured in the sample.) In total, over $8.5 trillion was transferred to individual households during this time period.

Average inheritances have risen in value by 75 percent during that same time period, from $169,000 in 1989 to $295,000 in 2016. Median estate size has also risen 35 percent, indicating that the growth in inheritances has been a broad trend at all wealth levels, although the overall average is being pulled up by extraordinarily wealthy individuals.

About 20 percent of households receive an inheritance, a share that has been relatively flat over the past thirty years. In addition, the median household that receives an inheritance has about $69,000 in annual income, no college degree, just $25,000 in retirement savings, and $303,000 in wealth, mostly in housing.

The average age adults receive an inheritance has risen from 41 in 1989 to 51 in 2016. Similarly, over 25 percent of inheritances go to adults over the age of 61, indicating that inheritances may be becoming less about lifestyle enhancement and more about retirement fortification for estate recipients.

Stocks, cash, and other investments represent about 46 percent of the value of the average estate, while real estate represents the balance. In addition, only about 9 percent of estates are comprised exclusively of housing assets, indicating that most inheritances include some liquid financial value.

A record amount of wealth will be transferred from Baby Boomers to Generation X adults (born between 1965-1976) in the coming decades, which will benefit an estimated one out of every five U.S. households. Over half of those estates will go to households that are approaching retirement age and low- or middle-income Americans, defying conventional wisdom that inheritances go to young jet-setters. While some households do receive inheritances that become lifestyle enhancements, more often estates seem to go toward shoring up the financial security of older Americans.

Findings

The total value of inheritances per year has risen by 119 percent over the past thirty years, from $195 billion in 1989 to $427 billion in 2016, once adjusted for inflation. (Ibid.) In total, over $8.5 trillion was transferred to individual households during this time period.

American households have been getting wealthier and older over time. The Federal Reserve, for instance, estimates that average wealth among U.S. households grew by 95 percent between 1989 and 2016, or from $353,000 in 1989 to $690,000 in 2016. This would suggest that inheritances likely have grown in value as well. But, alongside of that surge in wealth, the average longevity of a 60-year-old American has increased from 81 in 1989 to 83 in 2016, which could suggest that the extra wealth Americans carry into retirement is paying for the extra years of life they enjoy. (Life expectancy estimates are from the Center for Disease Control and Prevention’s United States Life Tables. See Arias E, Xu JQ, Kochanek KD. “United States life tables, 2016”. National Vital Statistics Reports; vol 68 no 4. Hyattsville, MD: National Center for Health Statistics. 2019. )

To determine how inheritances have changed in value, we relied on two nationally representative datasets. The first is the Federal Reserve’s Survey of Consumer Finances (SCF), a survey of 6,254 American families. (For details on the structure and contents of the Survey of Consumer Finances, see “Survey of Consumer Finances (SCF) – About”. Board of Governors of the Federal Reserve System. Updated March 16, 2017. https://www.federalreserve.gov/econres/aboutscf.htm.) It has been published triennially since 1983 and collects detailed information on the income, holdings, and general financial lives of each surveyed household. Since the survey went through significant methodological changes in 1989 and has remained relatively consistent since then, we have only used data from 1989 through 2016.

Second, we analyzed data from the University of Michigan’s Health and Retirement Study (HRS), a biannual panel survey made up of approximately 20,000 Americans, following them from age 50 through the end of their lives. (For details on the structure and contents of the Health and Retirement Study, see “The Health and Retirement Study”. University of Michigan. https://hrs.isr.umich.edu/about.) The survey is funded by the National Institute on Aging and the Social Security Administration.

We found that as Americans have gotten wealthier, the overall size of inheritances has also grown. In particular, we find that the total value of inheritances per year has risen by 119 percent over the past thirty years, from $195 billion in 1989 to $427 billion in 2016, once adjusted for inflation. In total, over $8.5 trillion was transferred to individual households during this time period. While large, we estimate that over $36 trillion will be left to families, charities, and other beneficiaries over the next 30 years.

FIGURE 1. Total inheritance received each year, in dollars ($B) and share of total wealth
Source: Authors' analysis of data from the Federal Reserve Board

To put these numbers in perspective, we considered the percentage of total wealth in the U.S. that inheritances represent. We find that, each year, inheritances account for roughly half of one percent of all wealth in the United States changing hands. While a small share, over a 30-year period that value can grow to represent a more substantive share of all wealth in the U.S.

Average inheritances have risen in value by 75 percent during that same time period, from $169,000 in 1989 to $295,000 in 2016. Median inheritance size has also risen 35 percent, indicating that the growth in inheritances has been a broad trend at all wealth levels, although the overall average is being pulled up by extraordinarily wealthy individuals.

While the overall value of inheritances has more than doubled over the past thirty years, we were interested in whether this was being driven by ultra-wealthy households or was a more general trend among households.

We first considered the average size of estates, finding that the mean inheritance received by someone in 2016 was worth about $295,000, up from approximately $169,000 thirty years ago (adjusted for inflation). But, since the average can be pulled up by very high outliers, we next examined the median estate size, or the value at which half of all inheritances are below and half are above. Looking at this more accurate assessment of the central tendency, or typical inheritance, we found that the median is $55,000, once inflation is accounted for. This is an increase of approximately $15,000 over this same thirty-year period.

These findings mean that it is not just the very wealthiest that are receiving larger inheritances. However, it is also true that the largest estates have seen substantial gains in value in recent decades.

Figure 2. Average inheritance size over time
Source: Authors' analysis of data from the Federal Reserve Board

We were also interested in the growth of major inheritances, which we categorized as $1 million or more (in 2016 dollars). We found that major inheritances, which are received by around 0.3% of people, have grown substantially over the last three decades, from an average of $2.7M in 1989 to $6.6M in 2016, an increase of 149 percent.

Figure 3. Share of population receiving major inheritances
Source: Authors' analysis of data from the Federal Reserve Board

About 20 percent of households receive an inheritance, a share that has been relatively flat over the past thirty years. In addition, the median household that receives an inheritance has about $69,000 in annual income, no college degree, just $25,000 in retirement savings, and $303,000 in wealth, mostly in housing.

While the surge in the value of the typical inheritance over time indicates that the increasing financial benefits of receiving estates are not limited to very wealthy families, we were interested if those benefits were also flowing to more or fewer people. It could be, for instance, that the median estate has grown in value over time because fewer people have estates: as healthcare costs have increased and people live longer lives, wealth in retirement may be dwindling for more people. Alternatively, as housing assets have appreciated, incomes increased, and the costs of investment management fallen, more households may be able to leave estates.

We find that the share of households that receive an inheritance over time has remained relatively flat. In particular, the percent of households that report ever receiving an estate has shifted only slightly in the last three decades, from 23 percent in 1989 to 20 percent in 2016. The share of households that have received an inheritance recently (in the last 8-12 years) has also remained flat over this time period, holding stable between 12 and 14 percent. This indicates that, while average inheritance size has grown, they do not appear to be going to a larger share of the population.

Figure 4. Share of the population that has received an inheritance
Source: Authors' analysis of data from the Federal Reserve Board

We were next interested in who is receiving inheritances. It could be only the already wealthy that receive these bequests. Or, it could be households with more modest means, which may instead use inheritances for much-needed retirement security or the purchase of a first home.

We find that the median households that receives an inheritance has about $69,000 in annual income, no college degree, just $25,000 in retirement savings, and $303,000 in wealth, mostly in housing. Looked at another way, 25 percent of households that receive an estate had less than $35,000 in annual income, which is about half the value of the median household income in America. These numbers indicate that inheritances, usually thought of as lining the pockets of the already wealthy, may more often represent the much-needed financial bolstering of households with modest assets.

The average age adults receive an inheritance has risen from 41 in 1989 to 51 in 2016. Similarly, over 25 percent of inheritances go to adults over the age of 61, indicating that inheritances may be becoming less about lifestyle enhancement and more about retirement fortification for estate recipients.

We were next interested in assessing when in life people receive inheritances. Popular portraits of inherited wealth often portray young trust fund kids receiving large lifestyle-enhancing gifts from their parents. However, as life has extended, it’s possible that these intergenerational gifts are more often going to middle-aged and older recipients.

We find that the average age at which someone receives an inheritance has increased substantially over the last thirty years, from age 41 in 1989 to 51 in 2016. This upward movement in average age of inheritance receipt does not appear to be the result of an increase in outliers. The 25th percentile, median, and 75th percentile values have all increased at roughly the same rate as the average.

Figure 5. Average age inheritance received
Source: Authors' analysis of data from the Federal Reserve Board

Taken together with the relatively modest financial profile of a typical inheritance recipient outlined above, this indicates that inheritances represent much more than a new Ferrari or better beach house for the young progeny of the ultra-wealthy (though it likely does mean these things in some cases). Instead, inheritances seem to be essential pieces of the retirement security puzzle, bolstering the assets of middle-of-the-road older households just before they retire.

Stocks, cash, and other investments represent about 46 percent of the value of the average estate, while real estate represents the balance. In addition, only about nine percent of estates are comprised exclusively of housing assets, indicating that most inheritances include some liquid financial value.

Finally, we were interested in the make-up of inherited assets. This breakdown of asset types within estates is important to note, as estates received in liquid form may be more valuable for shoring up retirement security than those in illiquid form. If the majority of inheritances were entirely composed of houses, for example, the true value of those inheritances to their recipients could be substantially lower, as houses have high transaction costs, incur property taxes, and may depreciate if their location falls out of favor. The nature of liquid assets, on the other hand, allows them to immediately be put to work in whatever form is most convenient for the recipient, in some cases making them far more useful for bolstering retirement security.

Using data from the University of Michigan’s Health and Retirement Study, we find that most estates are a mixture of the two types of assets, with the average being an almost even split between liquid and illiquid assets. Only a very small portion, nine percent of estates are composed entirely (95%+) of real estate. To put this number in perspective, of all wealth in the United States, roughly 43 percent is in financial (liquid) assets, while 57 percent is in non-financial (illiquid) assets. This means that the distribution of assets within estates roughly matches that of assets in the population at large.

Conclusion

A record amount of wealth will be transferred from Baby Boomers to Generation X adults (born between 1965-1976) in the coming decades, which will benefit an estimated one out of every five U.S. households. Over half of those estates will go to households that are approaching retirement age and low- or middle-income Americans, defying conventional wisdom that inheritances go to young jet-setters. While some households do receive inheritances that become lifestyle enhancements, more often estates seem to go toward shoring-up the retirement security of older Americans.

About the Authors

Matt Fellowes is the founder and head of United Income. Prior to founding United Income, Matt was the Chief Innovation Officer at Morningstar and the founder and CEO of HelloWallet, an award-winning financial guidance software company acquired by Morningstar Inc. in 2014, and a Fellow at the Brookings Institution. He currently sits on the Advisory Board of the Stanford Center on Longevity. A native of Chicago, he holds a Ph.D. from the University of North Carolina Chapel Hill, an MPP from Georgetown University, and a B.A. from St. Lawrence University.

Lincoln Plews is a Research Analyst at United Income. Previously, Lincoln served as a fellow with Princeton in Asia in Shanghai, China. He holds a B.A. from The College of Wooster.