Today’s working-age households, in aggregate, will inherit a
substantial amount of wealth. The effect of inheritances on retirement
readiness, however, is unclear. A recent study published by the Center uses the National
Retirement Risk Index (NRRI), which is based on the Federal Reserve’s Survey of
Consumer Finances (SCF), plus additional questions from the latest (2013) SCF
about inheritances to explore the extent to which inheritance receipts reduce
the percentage of households “at risk.”
The NRRI measures Americans’ retirement preparedness by
comparing projected replacement rates – retirement income as a percentage of
pre-retirement income – with target rates and shows that today’s workers face a
major retirement income challenge. Even if households work to age 65 and
annuitize all their financial assets, including the receipts from reverse
mortgages on their homes, more than half are at risk in retirement. The
question is the extent to which considering inheritances changes this story.
The SCF questionnaire asks people whether they have received
an inheritance. Not surprisingly, the percentage of households receiving an
inheritance increases with income, rising from 14 percent for the households in
the bottom third of the income distribution to 24 percent for those in the top
third.
For those who received an inheritance, the SCF asks the
value at the time received and when did they receive it. To update financial
inheritances to 2013, we assume an annual real rate of 4 percent and inflation
of 2.5 percent. If respondents’ inheritances include their house, the
questionnaire asks about the current value of the house. Combining house and
financial inheritances, median inheritances had appreciated to $87,500 by 2013.
The central question is how much higher would the NRRI be if
no households had received an inheritance. The methodology involves four steps.
The first is to project the value of the inheritances received to age 65. The
second is to calculate the annuity income at age 65 that is generated by the
inherited wealth. The third step is to subtract that annuity income from the
numerator of the original replacement rate to calculate a new replacement rate
for households that received inheritances. The final step is to recalculate the
NRRI with the reduced replacement rates for the households with inherited
wealth. Taking inheritances out of the 2013 NRRI raises the Index from its
current level of 51.6 percent to 52.4 percent, a statistically significant, but
modest, change.
The modest impact is due to the fact that: 1) only about
one-fifth of households have actually received an inheritance, so most are
unaffected; 2) among those receiving an inheritance, the amounts are relatively
small compared to the households’ total retirement income; and 3) most
households receiving an inheritance were already well above the NRRI’s “at
risk” cutoff, so removing the inheritance is not enough to put them at risk.
The bottom line is that, while anything that boosts
households’ assets is beneficial to their financial situation, inheritances are
not likely to be decisive in determining retirement preparedness for many
households.
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