January
25, 2001
Seattle—
In a recent article, Jagadeesh Gokhale (an advisor at the Federal Reserve Bank
of Cleveland) and Laurence Kotlikoff (a professor of economics at Boston University)
ask and answer two very important questions for baby boomers to consider as
they plan for their retirements:
*Are inheritances likely to increase substantially during the next few decades?
*Can today's middle-aged workers depend upon future inheritances to fund their
retirement years?
Below is the excerpted conclusion of the article titled, "The Baby
Boomers' Mega-Inheritance—Myth or Reality?" Despite common assumptions, the article concludes that boomers,
as a group, cannot rely on inheritances to fund their retirements any more than
their parents could rely on inheritances.
Financial, legal, and insurance professionals must help their clients to
understand this reality and to appreciate the need for planning, especially for
potentially catastrophic long-term care expenses.
Here is the article's conclusion:
"Although baby boomers will inherit more as a group than their parents
did, inheritances will be roughly the same as those of their parents when
considered relative to labor earnings. Our
estimates show that the size of the aggregate flow of U.S. bequests, measured
relative to labor compensation, has not changed much in the last 35 years and
is likely to remain near its current level for the next decade and a half.
"While boomer parents have more wealth than previous generations of
retirees, much of that wealth is annuitized, so that a smaller share is
bequeathable. And whatever resources
remain to bequeath will be split among more recipients because the boomers
have, on average, more siblings that their parents had. The amount boomer parents have to leave
their children may be reduced further because parents will live longer than any
previous set of retirees, spending down their wealth. Evidence shows that many boomer parents neither expect to leave
significant bequests to their children
nor believe it is important to do so.
"Our calculations also suggest that bequest flows will increase markedly
as a fraction of recipients' labor earnings only after the boomers retire and
begin to bequeath their own wealth to their children. Since it is uncertain whether Social Security and Medicare will
deliver all their promised benefits and boomers are unlikely to inherit much
from their parents, they would be wise to fund their retirement the old-fashioned
way--they'll have to save for it."
Source: Jagadeesh Gokhale and Laurence
Kotlikoff, "The Baby Boomers' Mega-Inheritance—Myth or Reality?",
Economic Commentary, Federal Reserve Bank of Cleveland, October 1, 2000. On-line at www.clev.frb.org/research/com2000/index.htm#1001.
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