The key to answer this question is to realize you are speaking about 'retirees' receiving this gift, or unexpected windfall or inheritance. We are not talking about someone in their 20’s, 30’s, or 40’s who have a different time horizon.
In my 32 years of practice I have seen this dozens of times. A client in their 50's, or 60's, receives an inheritance from Mom and Dad—often more than they anticipated. A client in their 70's or 80's receives an unexpected gift or windfall from a brother or sister for example.
What they all have in common is now they have a lot more money than they on average previously did and they don't want to lose it. Why do I say than they previously did?
Around half of American households have no retirement accounts at all. No 401(k)s, no IRAs, nothing. You might think that’s because they’re all expecting pension income in retirement. In fact, according to the Government Accountability Office (GAO), around 29% of households age 55 and older have neither retirement savings nor a pension. It doesn’t paint a pretty picture.
According to the Census Bureau, the (median) average net worth excluding home equity for an American 35-44 years old is $14,226. In the 55-64 age range, average net worth is $45,447.
What this simply means is that many Americans have not correctly planned properly for their retirement. Receiving an unexpected windfall, such as an inheritance for people we visit with is wonderful and stressful at the same time. Their biggest challenge is not to lose the inheritance/gift! They are looking for answers to have true “Peace of Mind” knowing they are making well-informed, thoughtful decisions with the blessing they’ve inherited. This is one of our specialties.
My father, born in 1920, grew up as a young boy before the Depression in 1929. He went to Undergrad and Graduated Law School at USC. My dad was a judge, and also an attorney for over 40 years. He remembered his first job, sharing with me how he earned less than $10 a week. I vividly remember how he taught me the value of losing money and what could happen if you were greedy. To him, losing a gift from someone was like a slap in the face. He often called the money he earned all those years, "Blood, Sweat and Tears". Those earnings, that "Blood, Sweat and Tears," my father earned to provide my mother, brother and me with an inheritance, and this shouldn't be frivolously spent - that's not what he intended for us to do with that money.
The five tips of advice are simple:
- Don’t squander and risk losing the gift - This is a True gift of love from someone that cares for you. Make it count.
- Remember the golden rule of investing when you are a retiree - When it comes to a blessing like an inheritance, our clients prefer not to take on the stress of investing and the potential of losing that money if the market drops. To them, health issues, loss of loved ones, and being unable to do all they had done when they were younger, are stressful enough.
- Real estate has recently been on a high recently - But with Janet Yellen raising interest rates 3 times last year, and now Jerome Powell is expected to raise interest rates 2 or 3 more times in 2018 after The Fed raised interest on March 2018 — is now the best time to buy real estate? We believe it is a seller’s market as inventory is low nationwide with demand very high. But, what will happen to prices as interest rates continue to rise?
- You could pay off your mortgage - Consider using the inheritance for something that provides real value, not instant gratification. Consider how you could use that money to pay off your mortgage instead of buying that shiny new Ferrari (base model cost nationwide of $176,048, according to truecar.com) you've been eying. A Ferrari might seem like a wonderful use of that money, but fast cars provide instant gratification. Having that security, knowing that your home is paid off and is your home - not partially the bank's home - that's real value.
- What about the stock market - It's been on a high, but with inflation and interest rates both on the rise, it's unclear how long it will be able to maintain the growth we've seen over the last several years. Not too long ago, the news we read or heard wasn’t all about inflation, or interest rate increases. One thing my dad always taught me was that what goes up, often comes down.
Our clients want certainty. They want “Peace of Mind”. While "Peace of Mind" means something different to everyone and can't be achieved through any one means, we develop strategies for clients using insurance products designed to provide income that will last throughout their retirement years and beyond. We help them navigate the ins and outs of the income strategy we develop – if we incorporate an annuity for guaranteed monthly income and principal protection, we make sure they’re aware of the surrender charges associated with that product and that those guarantees are backed by the insurance company who issued the contract. We make sure they understand there is limited access to that money because they are meant to provide income for the long-term. Knowing our clients won't outlive their retirement savings, or that they won’t lose their premium if the market crashes, can help add that level of security they're looking for. What are you looking for?
The tips and advice are we should all realize that a gift such as an inheritance is not meant to be squandered away. It is meant to remember the loved person(s) in your life that cared enough to think of you rather than give the money to someone else, or charity. It is meant to enjoy for your long-term. Receiving the money over the long-term gives you the opportunity to truly enjoy the gift from the person who cared to give it to you.
According to the Social Security Administration and my personal Social Security statement for 2018, they cite the following: Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 77 percent of scheduled benefits.
Think of this, in 16 years (2034), getting 77% of what you thought you would get after working all those years and contributing to Social Security. If you and your spouse believe you might get $3,625/month between the two of you, and you lose 23% of this in 2034 (100% minus 77%) – then you will lose over $10,000/year in income. If the government doesn’t find a solution, do you have a plan to account for that loss in income? Our clients appreciate we have a plan to address this loss that is probably coming.
The inheritance/windfall or gift you receive could be the key to replacing this lost income from Social Security if you need this money to live on. Most people tell us their number one financial concern is “running out of money”. They share they need more money to cover their expenses and lifestyle, along with paying taxes and inflation. Using an unexpected inheritance to fill any gap in lost income should help retirees pay for their expenses and maintain the standard of living they're accustomed to. How wise will you be with this money?
I was recently helping a new client who came to me for help in protecting and preserving his retirement assets when he told me, "I can’t afford to lose this money that was a gift from my mom and dad. I don't know how I could ever face my Dad if I lost this money". Yes, his father passed away already, but my client felt this obvious feeling because he knew how much effort went into accumulating that money over a lifetime - that same "Blood, Sweat and Tears" my dad always referred to.
Troy Bender, President and CEO at Asset Retention Insurance Services Inc., has more than 30 years of experience in the insurance and annuity industry.
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