Ever wondered what other people do with their inheritance? Do they save, spend or turn it down? According to Jay Zagorsky, from The Ohio State University in the US, it would appear that for roughly every dollar inherited, people save about one-half and either, spend, donate or lose the rest. His work, based on the analysis of data from two large samples of the US population, is published online in Springer's Journal of Family and Economic Issues.
Decisions about what we to do with inheritances have important ramifications beyond the individual – namely for families, financial markets and for the country. For families who save, their households have larger financial cushions. These windfalls can potentially make up for shortfalls in savings for retirement or their children's college education. If they spend, they are unlikely to improve their financial situation in the long run. In terms of the financial markets, if people spend most of their inheritances by liquidating stocks and bonds, market prices fall. For the government, estate taxes take a portion of the deceased person's wealth to generate revenue.
Zagorsky studied people's choices when faced with a windfall: do they save or spend the money? If they do save, how much? How much do they spend? And how much do they actually receive? By analyzing available data, Zagorsky shows that people, on average, only receive about two-thirds of a year's income in inheritance. The data also suggest that people in their 20s, 30s and 40s save roughly half of the money they inherit, and the other half is either spent or lost investing.
Is spending half an inheritance good or bad? According to Zagorsky, on the one hand it is good news for retailers, restaurant owners and people in the service industry. It is also good if the expenditures shift money into the hands of entrepreneurial individuals who use the money to hire workers and strengthen the economy.
On the other hand, the spending is bad news for those concerned about the low US savings rates, the financial destitution of many families and an inability of many individuals to delay gratification. The spending is also bad news for stock and bond prices.
Zagorsky concludes: "Teaching potential heirs about the temptation to spend the money, before the estate is distributed, may encourage more of them to invest or save their inheritance."
Zagorsky JL (2012). Do people save or spend their inheritances? Understanding what happens to inherited wealth. Journal of Family and Economic Issues; DOI 10.1007/s10834-012-9299-y
The full-text article is available to journalists on request.
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