Go Ahead and Spend Your Children's Inheritance: Teresa Ghilarducci

Bold retirees sport the bumper sticker “I am spending my children’s inheritance.” The sentiment might seem selfish, but it’s good financial planning.

Trying to leave a bequest could put older people in a tight spot. Finance author Chris Farrell once told me about a panicked 83-year-old woman with four kids who was on track to run out of money in three years because she was trying to save for her kids’ inheritance. She is not atypical.

Leaving a bequest can be especially hard for people who are widowed or divorced. Roughly, three-fourths of single elders express a desire to leave money to their kids. These households spend about 25% less on their own consumption.

This effort and anxiety may be misplaced. The truth is, most people don’t get an inheritance — only 22% of adult children born to parents without a college degree received an inheritance. For children of degree holders, that figure is only a little higher — 27%. And the median value was pretty small: parents without a college degree left $76,200 to their kids, while degree holders left $92,700.

The vast majority of Americans simply don’t have enough retirement wealth to maintain their pre-retirement standard of living in old age. Bequest planning is basically what the rich do: The top 1% of the households receive 35% of the value of all inheritances.

The recommended amount for most retirees is to sock away eight times your income in a retirement plan. If you earn $70,000 per year, you should have at least $560,000 in retirement accounts. But only the top 2% of households by lifetime income have actually saved this much. Although experts advise that many retirees would be better off annuitizing some of their wealth, wanting to leave money to their heirs bars them from making a financial decision that makes sense for them.