The world is told to expect a wealth transfer. One that will shake the core of the Earth. The ones who will be transferring are baby boomers and the party at the receiving end is millennials and Gen Xers. However, this wealth transfer has been expected for a while but never delivered. Or even if it was delivered, there has been no trickle-down effect that showed that the expanding gulf between the haves and the have-nots has been bridged, at least partially. Most countries are either underprepared to handle the transfer of wealth between generations or there is an unequal distribution of the wealth.
The incoming wealth transfer
The upcoming colossal shift of financial assets, known most commonly as the ‘great wealth transfer’ is expected to happen in the coming decade, involving the transfer of a large amount of wealth from baby boomers to the millennials and Gen Zers. In the US, this transfer is estimated at approximately $84 trillion, while in the UK, it is projected to be around £5.5 trillion.
Cross-generational wealth transfers are not uncommon, but the distinctive feature of the one happening this time is its sheer scale. It is large, beyond comprehension and unprecedented. Importantly, this event is predicted to have a cascading impact on various aspects of the economy. This is because the changes that will enter into society along with this will undoubtedly shape the new generation. Therefore, it is only natural that people are looking forward to it.
Ensuing the event of baby boomers entering their elder years, there is a growing interest and concern about what will happen to their accumulated wealth. In the US alone, baby boomers collectively are owners of a hefty amount of wealth. Over 55 million Americans who have surpassed the age of 65 hold half of America’s wealth, amounting to $96.4 trillion, as reported by the Federal Reserve. The expectation that is currently held is that as this older generation expires, their wealth will transfer to younger generations, providing much-needed financial assistance to cash-strapped families. This phenomenon is often referred to as the ‘Great Boomer Wealth Transfer’, where a large number of Gen Xers, millennials, and Gen Zers may receive an inheritance that could give them some breathing space in their financial situations. But the reality is not a rosy narrative as such and neither is it a linear narrative. Along with the wealth, financial anxiety is bequeathed as well.
The situation in the US
Yes, it is true that the financial landscape of most of the millennials and Gen Zers will change as a result of the transfer. It should not be denied that life will become easier. All the advantages are not lost in the wind. According to Jack Kelly writing for Forbes, the Silent Generation, who are the parents of the baby boomers, and the baby boomers themselves are expected to transfer a staggering $84.4 trillion in assets through 2045. Of this value, approximately $72.6 trillion is earmarked for direct inheritance by their heirs. An analysis conducted by financial market intelligence firm Cerulli and Associates reveals that this transfer of wealth will trigger a wave of transformative changes for the ones at the receiving end. It will add to their capacity to purchase homes, deal with student debt (at least to a certain extent), fund the desire to travel, buy luxury goods and invest in the stock market.
But there is a catch. Once you break down the accumulated wealth into its demographics, by either the age bracket or income levels, it is evident that most of the wealth held by baby boomers is concentrated among a small number of individuals. Historical data is proof that younger generations should not get their hopes up about wealth transfer. According to Business Insider, a 2019 study by the Federal Reserve revealed the disparities in inheritance amounts. The wealthiest 1% of Americans who received inheritances reported an average of $791,000. In contrast, individuals in the bottom 50% of the wealth distribution scale received an average of $9700. Even for families in the 51% to 90% income range, the average inheritance was $46,000, which, while large, may not be life-changing for most recipients. In addition to that, during the time that boomers are alive, they must use their money on healthcare and various other services that they might require at their ripe old age. And not many are keen on the option of saving for their offspring over spending it on themselves.
The situation in Australia
In Australia, the situation does not bear much resemblance to that of the US. A report titled ‘Rainbow’s End’, created by Fidelity International in collaboration with independent research firm MYMAVINS shows that many Australians have the desire to pass on their wealth to their loved ones. However, they lack the appropriate strategies and information to ensure a seamless transition.
$100 trillion. The amount that is expected to be passed down from baby boomers to their offspring within the next 20 years. As mentioned in Firstlinks, a 2021 report from the Productivity Commission estimated that Australia alone would see the transfer of around $3.5 trillion in assets by 2050. The inherited assets are expected to be a combination of superannuation funds and residential properties. It is forecasted that the value of inherited assets will surge from $120 billion to $500 billion over the next 25 years.
The concern that Australia is grappling with currently is that all research points to a transfer that may occur sooner than expected. Baby boomers are said to be resigning from their occupations at an accelerated rate. By 2028 they will be largely absent from the job market. And in 2027, the first batch of baby boomers will reach the statistical age of death (81 years for men and 85 years for women). In the same vein, baby boomer superannuation balances will experience a drop due to retirement spending and eventually as a result of inheritance distribution. Even though most Australians show an interest in transferring their wealth to a second party while they are alive, their concerns such as financial worries, family issues, and legal and administrative issues indicate that they are unsure about which path to take.
Irrespective of the outlook, it all boils down to seeking out proper advice to learn how to tackle the passing down of generational wealth. As appealing as the idea of receiving wealth may seem, even though baby boomers are sitting on a lot of wealth that ideally should be (and perhaps will be) handed down to their successors, receiving a lump sum will not solve the chronic financial issues that most millennials and Gen Zers are a part of. Therefore, it is best not to place an unnecessary amount of trust in inheritances. At least not when it comes to wealth.
(Sandunlekha Ekanayake)