Many Americans assume that inheritances will solve their money problems--but don't count on it
As life expectancy increases, and older Americans are living longer, the idea of inheriting a significant sum of money has become a hopeful solution for many facing financial challenges. However, depending on inheritances to bail you out of money problems is a risky strategy that could leave you unprepared for the realities of the future.
Longer Lifespans, Smaller Inheritances
One reason your parents may leave a smaller inheritance than you expect is that their generation is living longer. The number of Americans who are 95 and older grew 48.6% from 2010 to 2020, according to the 2020 Census. The demographic shift towards longer lifespans means that older Americans are not only living longer but also spending more of their savings during their retirement years. As a result, the inheritances left behind may be smaller than anticipated, leaving heirs with less financial support than they might have expected.
Medical expenses and long-term-care costs could also reduce the amount of money you’ll receive when your parents and grandparents pass away. Seven out of 10 people age 65 or older will need some kind of long-term care in their lifetime, according to the National Center for Health Statistics. The median cost of a semi-private room in a nursing home is $7,908 a month, according to Genworth’s Cost of Care survey.
Additionally, a 2020 Federal Reserve analysis found that the average inheritance was $46,200. However, even that figure was inflated by legacies passed down in wealthy families, according to the Federal Reserve.
Uncertainties in Estate Planning, Fraud, and Inflation
“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,” says Bill Schretter, a certified financial planner with wealth-management firm Allworth Financial.
Fraud losses are another concerning issue. As people 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.
As a result, the complexity of estate planning, tax implications, fraud inflation, and other unforeseen expenses can significantly impact the amount of money left as an inheritance. Relying on an uncertain future windfall might lead to financial disappointment, especially if unexpected costs or legal challenges arise.
The Importance of Financial Independence
Inheritances are typically distributed after the passing of a loved one, and it's unwise to hinge your financial stability on events that are beyond your control. If you have immediate money problems, waiting for an inheritance might not provide the timely relief you need.
Depending on inheritances to solve financial woes undermines the concept of financial independence. Building your financial security through savings, investments, and responsible budgeting is a more proactive and reliable approach than banking on uncertain future windfalls.
Instead of relying solely on potential inheritances, consider focusing on strategies that promote financial independence. This includes building an emergency fund, investing wisely, paying down debt, and creating a comprehensive financial plan that aligns with your long-term goals.
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