Waiting for The Windfall

By JON D. HULL SAN FRANCISCO

CONSIDER FOR A MOMENT THE FInancial circumstances of an up-and-coming colleague or neighbor. Owns a nice house? Drives a new car? Dines out a lot? Appears calm even when discussing college tuition or the latest property-tax hike? Now take a good guess at his or her income. If it doesn't add up to the outgo, it's likely that the shortfall is being covered by one of the most important -- but little discussed -- determinants of baby-boomer wealth in the 1990s: family inheritance.

Although the subject of inheritance is one of the last taboos in the once crowded American closet, it's getting harder and harder to conceal its prodigious effects on the huge segment of the population born after World War II. Says Brian O'Brien, 30, who used a $20,000 cash infusion from his parents to buy a $235,000 three-bedroom house in Walnut Creek, California, last year: "It's kind of like the unspoken reality of our generation. Everybody gets by and buys houses, and nobody asks where the money came from."

The baby boomers' parents, those members of the World War II cohort now in the twilight of their lives, are the wealthiest generation in American history. Blessed by the real estate boom of the 1970s and '80s, the stock- market surge of the '80s and lucrative pensions, Social Security payments and a high savings rate, older Americans as a group have amassed a nest egg that New York University economist Edward Wolff values at $5.3 trillion -- an average of $258,000 for each household headed by a person over 64. Those assets mean an unprecedented windfall for many otherwise struggling younger Americans. The money is already flowing fast: the share of total household net worth derived from inheritances and family gifts jumped from 47% in 1962 to 71% in 1989, according to Wolff. "This is a radical turnaround," he says. "People used to support their parents in old age. Now the elderly are supporting their children and in many cases their grandchildren."

The irony is that these are the same children and grandchildren who have complained bitterly that they have been unable to achieve the affluence of their parents, despite two-income families, longer work hours and all the other sacrifices that now define a generation. They have also suffered under the burden of Social Security and Medicare taxes that consume as much as 15% of their incomes -- all monies that are paid directly to their elders in one of the largest transfers of wealth in American history. All told, some 60% of federal entitlements go to those over 64, even though they account for only 12% of the population.

Yet many of these younger Americans stand poised to inherit their parents' wealth, and the Winnebago to boot. This enormous endowment, much of which is handed down in the form of gifts while parents are still alive, forms an invisible safety net beneath millions of young families and explains their ability to sleep soundly at night despite being overworked and underpaid. Says O'Brien: "I know I'm going to inherit. That's my peace of mind."

In many cases, the transfer of wealth is such that it has even put strains on the older generation. San Francisco lawyer William Bagley, for example, says the ongoing needs of his children mean that he has "no realistic hope of retirement," even though he earns several hundred thousand dollars a year and has some $500,000 in liquid assets. He has put three children through college, and is supporting two more in graduate school. He has also helped three of his children buy homes. In 1989 Bagley gave his daughter Lynn, 40, $30,000 to help cover a down payment for a $235,000 house in Novato, California. "I think our parents were a little more responsible about money," says Lynn, a single mother who earns $55,000 as founder of the Marin County Farmers' Market. She too confesses that the prospect of an inheritance inevitably figures in her future planning: "It's just such an unhappy subject, but I'm aware of the safety net."

The folks don't necessarily need to be rich in order to leave a respectable inheritance. Among homeowners 65 and older, more than 80% have paid off their mortgage. The number of deaths among this group is expected to rise from 1.3 million in 1980 to 1.8 million in 2000, which converts into a lot of teary- eyed beneficiaries. On average, each can expect to inherit $50,000, according to Wolff. Warns Ken Dychtwald, president of Age Wave Inc., a consulting group in Emeryville, California: "There's going to be an inheritance cascade."

Kurt Oelerich, 29, a C.P.A. at Ernst & Young in Chicago, still marvels at his father Frank's financial feats. "He's already paid for 18 years of college for five kids, and he was even unemployed for one of those years," says Kurt. "I asked him, 'How did you do it?' " Easy, replies Frank: "I wasn't that frugal. We bought our first home in 1961 for $19,500, a brand-new three-bedroom in Jacksonville, Florida, with $5,000 down, and we just traded up, paying off loans with rapidly inflating housing prices." Nine houses and one apartment later, Frank and his wife Anita are feeling prosperous. "I think it is going to be extremely difficult for young adults to establish a savings plan," he says. Kurt puts it differently: "Inheritance is a big part of my future plan."

But many young Americans are almost certain to be disappointed. Baby boomers have to share any inheritance with a greater number of siblings. Divorce and remarriage can also foil the best-laid wills. A University of Pennsylvania study found that nearly 25% of divorced fathers had no contact with their kids during the previous five years, a fact that could influence Dad's last will and testament. And Boston University economist Laurence Kotlikoff argues that inheritances and gifts -- while significant -- actually account for a declining share of young family income, in part because older Americans are increasingly dependent on Social Security and pension benefits, which can't be bequeathed.

Then there is the problem of longevity. With millions of seniors eating right, exercising and forgoing tobacco and alcohol, lots of potential beneficiaries are starting to, well, wonder. "There is the concern that, 'Yes, I'll inherit something, but I may be 70 when I get it,' " says Katherine Triolo, a financial planner in Appleton, Wisconsin. Heirs beware: the typical 65-year-old man can expect to live another 15 years, while women can bank on an additional 19. Americans 100 and over constitute the fastest- growing segment of the population. Despite rising life expectancies, older Americans are still retiring earlier, effectively burning the old estate at both ends.

The suppressed fears of many offspring are targeted by the popular bumper sticker, displayed only partly in jest, that boasts, WE'RE SPENDING OUR CHILDREN'S INHERITANCE. A 1991 survey conducted by the Gediman Research Group found that 64% of affluent Americans are more concerned with enjoying a comfortable retirement than leaving behind a sizable estate. "I'm free of guilt," says William McCarty, 66, a former grain and cattle farmer from Sheldon, Iowa, who has traveled to China and Russia since retiring. Next month he's off to Germany and Italy. "I keep telling my sons that I'm not going until it's all gone."

But the real threat to anxious heirs comes not from gilded wheelchairs and Carnival Cruise Lines but medical bills. With average annual costs of nursing- home care running at about $30,000, few estates can survive a long convalescence. The only solace is that not all families get soaked. A study in the New England Journal of Medicine reports that among those 65 and older, 43% will enter a nursing home at some point. Of those, 26% will stay less than three months over their lifetime, and 45% will stay less than a year.

The elderly are quick -- and correct -- to denounce the low savings rate among the young. But the growing reliance on subsidies from older generations is more a function of despair than greed, reflecting the downward mobility of millions of young families. "Inheritance looms larger by default," says Phillip Longman, author of Born to Pay: The New Politics of Aging in America. "Increasingly, the only way for the young middle class to stay in the middle class is to inherit the trappings."

Left to their own devices, most young families are slipping. The Children's Defense Fund reports that inflation-adjusted income for parents under 30 dropped 32% between 1973 and 1990. Home ownership among households 24 and younger dropped from 23% in 1973 to 16% in 1991 -- even as the rate among the elderly rose from 70% to 77%. "You're at a real disadvantage if you don't have your parents' money to back you up," says Dan Weber, a junior and psychology major at the University of Kansas. "If I fall on my face, I have my parents to catch me."

Paul and Dione Goyette, both 28, decided to open three separate savings funds just after they got married in 1990: one for education, another for buying a house and a third for retirement. He is a financial analyst for Citibank, and she works for United Airlines; together they manage to gross between $50,000 and $70,000 a year. At their current savings rate, Paul doubts they'll ever reach their goals. He moans, "From what I read, it's going to cost a billion dollars a semester to put our kids through college."

But the Goyettes have a fallback. Last March they bought a two-bedroom house in Chicago for $145,000, thanks to a $25,000 loan from their parents. "To save up $30,000 in six years out of college is damn near impossible, especially if you're just Joe-average Citibank employee like me," says Paul. With a baby due in May, they're bracing for a pay cut. "Fortunately, all the baby stuff will come from our parents, since this is the first grandchild," says Paul. Even so, he's not entirely comfortable with the arrangement. He says, "If we depend on our parents and something happens, and we don't get it, what are our children going to do?"

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CREDIT: [TMFONT 1 d #666666 d {Source: Edward Wolff, New York University}]TIME Graphic by Steve Har

CAPTION: SENIOR HOUSEHOLDERS HAVE MORE SQUIRRELED AWAY . . .

. . . TO GIVE TO THEIR STRUGGLING OFFSPRING