Why Banking on an Inheritance Could Backfire on Millennials and Gen Z

0eyetoeyePIX · iStock.comMany Americans expect an inheritance to boost retirement security, but financial planners outline the risks of relying on future wealth.It’s possible that your parents or grandparents have every intention of leaving you money. That said, their retirement spending will likely come first, and the inheritance you might be counting on could shrink long before it reaches your bank account.

If you’re someone who’s postponing your own retirement contributions in anticipation of a family windfall, well, that’s an awfully expensive gamble.

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According to a Northwestern Mutual Planning & Progress study, half of the Americans expecting an inheritance said such a windfall was critical to their long-term financial security or retirement. Among millennials expecting one, that figure rose to a staggering 59%. While the survey only polled 4,588 U.S. adults, its findings revealed a broader disconnect between what younger people anticipate and what older generations plan to leave.

Some 38% of Gen Z respondents to the study said they expect to receive an inheritance, while only 22% of Gen X respondents intend to leave any kind of financial gift behind. These aren’t matched parents and children, so those figures don’t establish how many inheritances will actually materialize. However, they do suggest that those expecting an inheritance to finance their retirement should take a closer look at the situation.

The anticipated contribution to retirement isn’t enormous, either. Across all respondents, inheritances were expected to provide only an average of 6% of retirement funding.

It’s important to remember that a parents’ estate isn’t a fixed sum waiting to be distributed. They have their own living expenses that will continue for as long as their retirement lasts, while substantial care needs could also consume much of the savings that any heirs might assume would remain untouched.

Research from U.K. retirement provider Standard Life highlighted the dangerous temptation of counting on future family money. Its Retirement Voice report found 24% of Gen Z who were polled weren’t even prioritizing retirement savings because they expected an inheritance. While those findings pertain to the U.K. rather than American households, the underlying financial uncertainty isn’t native to any country: Nobody knows in advance how much their parents will need later in life.

Sometimes, even the family’s intentions may be unclear. In fact, Northwestern Mutual found that 47% of boomers and older adults who expected to leave an inheritance or gift hadn’t even discussed their plans with relatives.

If you happen to be banking on an inheritance, consider what would happen if it never arrived. Estimate your retirement spending and subtract the income you expect from Social Security. Then, compare the remaining need with your current savings and planned contributions. If the numbers don’t work, waiting for a future payout leaves the problem very unresolved while valuable savings years pass.

An employer’s 401(k) match may offer a practical place to begin increasing contributions, provided your budget allows. Review your progress after pay raises, rather than assuming an inheritance will close the gap. You can also ask your parents whether they have an estate plan without pressing them to promise an amount they may need themselves.

An inheritance received after your parents’ retirement might pay for a major expense, or maybe it could reduce pressure on your savings. However, it likely won't replace the investment growth you missed while waiting only for it, and doing nothing for your own retirement in the meantime.

A safer, more reliable option would be to build your retirement budget around the money that you’re saving now, and decide what to do with an inheritance only when (and if) it actually arrives.

This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.

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