Kids, Confidence — and Causation

 It seems that having kids can be good for your retirement confidence.

At least that’s the headline regarding a new survey from Allianz Life that finds that Americans without children are significantly less confident in their ability to meet their retirement savings goal — 54%, compared with 72% of those with children.

Now I’m sure that result is supposed to be counter-intuitive because — let’s face it — kids are expensive. There’s food, clothing, childcare, education, healthcare and, in some cases, financial support long after they have theoretically “left” the nest. So, it would seem logical that Americans without children would have more money available for retirement — and greater confidence about their prospects.[i]

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Parental Planning?

Well, as it turns out, it may not be children that account for the confidence — at least not directly. Rather, Allianz suggests that parenthood may provide a catalyst for financial planning. According to the survey, 62% of Americans without children don’t have a written financial plan, compared with 42% of parents.

There’s surely something to that. Having children has a way of bringing financial responsibilities into sharper focus. Suddenly, there are dependents to protect, college expenses to anticipate and estate-planning decisions to make. Even people who have been content to take their own financial future for granted may become more purposeful when someone else is counting on them.

But having a reason to plan isn’t the same as having the resources to succeed. Nor does confidence necessarily equate to readiness.

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Confidence ‘Game’

Now, as a parent — and someone who believes that having a plan can not only inspire confidence, but help justify it — I’m reluctant to cast doubt on that conclusion.

That said, “Americans without children” is a broad category. It could include a 27-year-old who hasn’t had children yet, a 45-year-old who chose not to, someone (of indeterminate age) who wanted children but couldn’t have them, and an older adult who just never became a parent. Those individuals may have little in common beyond the survey category into which they have just been slotted.

Age alone could explain part of the confidence gap — as could marital status, household income, homeownership, employment, access to a workplace retirement plan, or whether the household has one income or two. At least from the published results, we don’t know whether the 18-point confidence difference persists after controlling for those factors.[ii]

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There’s also the possibility that the assumed direction of cause and effect is backward. Perhaps having children causes people to plan and feel more confident. But it’s also possible that individuals who already feel financially secure are more willing to have children, while some who feel less secure decide they can’t afford to do so.

Then there’s the written financial plan. Having one may well increase confidence, but it could also simply be another manifestation of wealth, income or access to professional advice. More affluent households are likely both to have written plans and to feel more confident about retirement. The plan may contribute to that confidence without being its sole cause — or even the primary one. It may not even be a good or workable plan.

Let’s face it. The Allianz findings don’t establish that having children makes people better prepared for retirement. In fact, they don’t establish that having children is what produced the difference in confidence — only that parents in this survey were more confident.

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Children may offer an incentive to plan — and perhaps an expectation of support later in life. But they also bring expenses that compete directly with retirement savings. Those without children may have fewer current obligations, but greater awareness that they will have to finance and manage more of their own care.

Look, far be it from me to discourage a healthy connection between having kids and retirement preparation. Having children can — and certainly should — provide plenty of motivation to plan for the future.

But, in and of themselves — and as much as they add to our lives — they’re no retirement plan.

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• Nevin E. Adams, JD

 

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[i] Although among parents, those with one or two children were more confident than those with three or more, 74% versus 66%, respectively.

[ii] Indeed, survey participants generally needed annual household income of at least $50,000 for singles or $75,000 for married or partnered respondents — or at least $150,000 in investable assets. Consequently, the findings tell us less about lower-income households, where both the costs of raising children and the challenges of retirement saving may be even more pronounced.

Spending Their Inheritance?

 Apparently, Baby Boomers have some ‘splainin to do.

Yes, after decades of being blamed for everything from the demise of defined benefit pensions to the price of housing, Boomers are now being castigated for something else: spending the money that their children were (apparently) counting on inheriting.

Indeed, there’s been a lot of talk about the so-called “Great Wealth Transfer” — and lately a fair amount of consternation that Boomers might actually spend some of that wealth before they die.

Which got me wondering: How much did the Boomers actually inherit from their parents?

Turns out, for most, not all that much.

Back in 2011, researchers at Boston College’s Center for Retirement Research[i] took a specific look at that question. They estimated that about two-thirds of Boomer households would ultimately receive an inheritance.

And that median expected inheritance was ... (just) $64,000.

Now, $64,000 is certainly nothing to sneeze at. But neither is it the kind of generational windfall suggested by much of the current discussion about the wealth Boomers are now supposedly “obligated” to leave behind.

And remember that was the median among those expected to receive an inheritance.

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Roughly one-third weren’t expected to receive any … at all.

An Inheritance ‘Average’?

Federal Reserve data[ii] provides some additional perspective.

Looking at inheritances received between 1995 and 2016 — a period during which many Boomers would have been receiving inheritances from their parents, btw — more than half, 55%, were worth less than $50,000. Another 30% were between $50,000 and $250,000.

Only about 6% exceeded $500,000, and just 2% topped $1 million. But those million-dollar inheritances accounted for roughly 40% of all the dollars inherited.

In other words, a relatively tiny number of enormous inheritances can make the overall inheritance “pie” look a whole lot bigger than the slice received by a typical family. And remember, even then they weren’t all that big.

So, what’s got everyone so stirred up?

As it turns out, Cerulli Associates — a credible source, but one whose projections often seem to run on steroids — recently estimated[iii] that an astonishing $124 trillion will transfer through 2048. Of that, $105 trillion is projected to go to heirs, while $18 trillion will go to charity.

Which means they estimate that nearly $100 trillion is expected to come from Boomers and generations older than them in what has been dubbed (drumroll, please) the “Great Wealth Transfer.”

But hold on a second. More than $62 trillion — half of that entire projected transfer — is expected to come from high- and ultra-high-net-worth households that comprise … just 2% of all households.

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At this point you should be saying to yourself, “could this be (yet) another one of those situations where an enormous aggregate number tells us considerably less about the experience of a typical American than the click-baiting headlines suggest?

Great Expectations?

But wait — there’s more!

Not all that wealth is heading directly to Millennials and Gen X.

Cerulli further estimates that some $54 trillion will first transfer “horizontally” between spouses, with more than 95% of those assets going to women. Nearly $40 trillion is projected to move to widowed women in the Boomer and older generations before eventually moving on to heirs or charities.[iv]

Which means the Great Wealth Transfer isn’t really a single transfer at all. And it certainly doesn’t mean that there’s a $124 trillion check waiting to be divided among America’s children.

Yet that enormous number seems to have helped create some enormous expectations.

We’ve seen stories about “SKI” — Spending the Kids’ Inheritance — and Boomers “indulging” in travel, second homes and experiences rather than preserving their assets for their children. There’s even a growing presumption that parents should transfer wealth sooner, when their children can make better use of it.

Honestly, my wife and I have done some of that with our kids. But there’s something odd about treating an inheritance as though it were an obligation — particularly when the generation supposedly “shirking” that obligation largely built its own wealth without receiving anything remotely comparable.

To be sure, Boomers benefited from some extraordinarily favorable economic circumstances: decades of rising home values, a remarkable bull market in equities, relatively inexpensive higher education (RELATIVELY, mind you) and, for some (though not most, mind you), traditional pensions. Timing matters, and they (we?) had some pretty good timing.[v]

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But they (we?) also saved, invested, paid mortgages, raised families — and accumulated much of the wealth we’re now discussing over decades. We did it despite wars, gas lines, stagflation. And let me point out, spending a fair amount of that on the kids now chomping at the proverbial bit of a potential inheritance.

Our parents generally didn’t leave us fortunes. Nor did we expect them to.

‘Will’ Power

None of this is an argument against leaving an inheritance.

Nor is it an argument against helping children or grandchildren while you’re still around to see the impact. Indeed, there are compelling reasons to do so if your circumstances and retirement security permit it.

But retirement planning has always had an awkward uncertainty at its core: You don’t know how long you’ll live, what markets will do, what inflation will be, or what health and long-term care might cost. And nobody wants to be a financial or physical burden on their kids if they don’t have to.

Telling retirees simultaneously that they must make their money last for an unknowable lifetime — and that they should feel guilty if there isn’t enough left over afterward — seems like an interesting, if conflicted, set of expectations.

So perhaps before criticizing Boomers for spending their children’s inheritance, we should remember how much inheritance most of them started with.

For a lot of them — most of them — the answer was pretty simple.

Not much.

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An inheritance is a wonderful thing to receive.

It just shouldn’t be a retirement plan. And it shouldn’t undermine one, either.

• Nevin E. Adams, JD

 

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[i] See How Important Are Inheritances for Baby Boomers? – Center for Retirement Research.

[ii] See Federal Reserve Board - How Does Intergenerational Wealth Transmission Affect Wealth Concentration? Accessible Data.

[iii] See https://www.cerulli.com/press-releases/cerulli-anticipates-124-trillion-in-wealth-will-transfer-through-2048

[iv] Wealth management practices, take note!

[v] Of course, they/we also lived through some pretty tumultuous market cycles.