How Do Inheritances Affect the National Retirement Risk Index?

Today’s working-age households, in aggregate, will inherit a substantial amount of wealth. The effect of inheritances on retirement readiness, however, is un­clear. On the one hand, past research has shown that higher-income households – who are less likely to be unprepared for retirement – are more likely to receive inheritances and to receive larger amounts than their lower-income counterparts. On the other hand, the anticipated inheritance receipts of low- and middle-in­come households represent a much larger percentage of their current wealth, suggesting that inheritances could potentially be more influential in boosting their retirement security. This brief 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 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 discussion proceeds as follows. The first section describes the NRRI. The second section discusses the inheritance questions in the SCF and shows the relationship between inheritance responses and the NRRI status of households. The third section reports on the percentage of households that would have been at risk in the absence of inheritances, by subtracting inheritances from the wealth currently held by NRRI households. The fourth section ex­plores how more inheritances in the future – perhaps as a result of unspent 401(k) balances – might reduce the percentage at risk. The final section concludes that inheritances already received – and potential increased inheritances from unspent 401(k) balances – have only a modest effect on the overall percentage of households at risk. The reasons are that many households do not receive any inheritance at all and – among those that do – most inheritances are relatively small and the large inheritances go to households already prepared for retirement.