THE BLOG
04/17/2013 01:05 pm ET Updated Jun 17, 2013

Are Your Parents Spending Your Inheritance?

Most people who grew up during the Great Depression and World War II learned to scrimp and save as a matter of necessity. Many also gained financial security during subsequent decades when pension plans were more common, homeownership became the norm and government programs like Social Security and Medicare expanded. For a time, it seemed their Baby Boomer children stood to inherit amounts unheard of for previous generations.

However, many economic factors have taken their toll on seniors' nest eggs in recent years. Thus, if you were counting on a sizeable inheritance to help finance your own retirement, you may want to rethink that strategy.

Here are several reasons why many seniors have been forced to revise their estate distribution plans (and indeed, to reevaluate how to fund their remaining retirement years) -- and why their heirs may need to rethink their own savings and retirement plans if they were relying on an inheritance:

Plunging retirement account values. Most people who invested heavily in the stock market during the Great Recession watched helplessly as their accounts lost significant value. Although the market has mostly recovered, many people -- especially those in or approaching retirement -- stashed their remaining balances in safer investments earning very low interest, worried the market might plunge further.

Younger savers still have many years to catch up, but it may be very difficult for retirees. Unless they reentered the stock market a few years ago, chances are they've missed out on much of its resurgence and their accounts are thus doubly dinged. Many likely will have to draw on their account principal to make ends meet, thereby depleting their savings much more rapidly than planned.

Home equity woes. One primary cause of the stock market crash was an out-of-control housing market where prices rose unrealistically and people acquired risky mortgages they couldn't afford. Many seniors, hoping their home's equity would help fund retirement, instead found its value drastically reduced. Fortunately, the housing market has begun to recover. But many tapped-out seniors have turned to reverse mortgages and home equity loans to draw on their home's equity to cover living expenses, thereby lessening their estate's future value.

We're living longer. As average life spans increase, so does the period we'll need to survive on our retirement savings. According to Social Security calculations, a 65-year-old man today will live until 83 on average; for women it jumps to 85. And a quarter of 65-year-olds will live past age 90. Many people never imagined their savings would have to last that long and didn't plan accordingly.

Skyrocketing healthcare costs. Even if they buy Medicare prescription drug and Medigap coverage, seniors, like everyone else, spend an ever-increasing percentage of their income on medical care. Such costs usually far outpace benefit cost-of-living increases and interest earned on investments -- especially from low-risk investment vehicles many seniors favor.

Government programs are overburdened. Baby Boomers have begun tapping Social Security and Medicare benefits, and that number will grow rapidly. Plus, far fewer younger workers now fund those programs, so it's possible that benefits will decrease, premiums will rise or taxes will increase -- or a combination of all three; all options would strain fixed incomes.

Misguided early retirement. When the market was booming, many people retired early, assuming they could afford to bridge the gap before receiving Social Security and Medicare. But plummeting home equity and reduced 401(k) balances have forced many retirees to aggressively withdraw from savings, trim expenses or even return to work.

Spreading the wealth early. Many seniors help their children and grandchildren pay for high-ticket expenses like home down payments and college. Although such gifts reduce the eventual value of their estate, there are certain tax advantages (lower estate taxes, state tax deductions for 529 Plan contributions, etc.), not to mention the joy of being able to help loved ones.

Just be sure that if you're the recipient you don't take such assistance as license to take on additional debt. And if you're on the giving end, be sure to consult a financial planning expert to help properly structure any such gifts. If you don't have a trusted referral, good resources include the Financial Planning Association, the National Association of Personal Financial Advisors and the Certified Financial Planner Board of Standards.

Long-term care. Unless they've purchased comprehensive long-term care insurance (which is quite expensive and can be difficult to qualify for), your parents will likely burn through most of their savings should they ever require assisted living. And keep in mind that Medicaid will only pay for a nursing home once they've exhausted most of their assets.

Bottom line: With seniors facing increasing financial challenges, don't depend on an inheritance to provide your financial security.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

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