Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 384

Generational wealth transfers will affect all investors

And as he hung up the phone it occurred to me
He’d grown up just like me,
My boy was just like me.

Harry Chapin, 'Cat’s in the Cradle'

One of the largest transfers of wealth in history will occur in the next few years, depending on the health and goodwill of the Baby Boomer generation.

According to US demographic figures, Boomers are the wealthiest generation in history and are currently the custodians of circa USD68 trillion in assets says Cerulli Associates, a US research firm. According to Forbes, Boomers control roughly 70% of all disposable income and have vastly differing attitudes to their parents and their heirs.

What happens when the time comes for this generation to pass down these titanic asset holdings, who will receive them and what impact will this transfer have on the world as a whole?

Who will receive this wealth?

The question now looms, who will receive all of that money?

The first suggestion is Millennials, the heirs of the Baby Boomers, presently aged around 25 to 40 years. The numbers vary, but the most consistent estimate is that Millennials will be five times richer in 2030 than they are today due to this transfer of wealth. And that figure is just for the US. In Australia, Millennials will inherit AUD3.5 trillion over the next 20 years, an average of $320,000 per person.

But there is uncertainty around how much of the Boomers’ wealth will go to their children. The reason is simple: Boomers want to spend their hard-earned cash.

Figure 1: Incidence of inheritance by age, selected OECD countries

Source: Citi Group

Consistent across OECD countries (and most developed nations), more than half of the Baby Boomers do not have an estate allocated to their children. In fact, estimates by CNBC suggest that only 57% of total assets will transfer to Millennials over the next 20 years.

The Boomer generation more than any other has a penchant for spending its own money rather than acting as a walking piggy bank for the next-in-line generation. A Citi Private Bank commentator said that since Baby Boomers are on balance living in a more peaceful and prosperous time than their parents, many don’t consider the same drive to ‘set up’ the next generation. In the absence of war or decades-long financial collapse, the status quo of leaving a nest egg to protect children has been disrupted somewhat.

So where will the money go, if not to their children?

For the most part, back into the economy.

Boomers are living longer, and 65-70 is no longer the twilight years of life. And funding must be put towards retirement living, senior living accommodation, holiday homes and much more.

A lot will remain in the stock market as well, with Baby Boomers having the second lowest average allocation of wealth to ‘cash’ in the last 100 years (according to BlackRock).

Figure 2: Cash allocation

Source: BlackRock

What will be the aftermath of the Great Wealth Transfer?

For any Baby Boomers reading this, you probably know that your children’s outlook on the world and investing is different to your own. The result of this divide in perspective will have consequences for the global economy, and particularly in the realm of financial advice and investing.

Studies reported by CNBC show that over 80% of children who inherit their parents’ wealth will look for a new financial adviser. This represents tens of trillions which will shift between different advisors over the next few decades.

Millennials also prefer to invest into physical assets such as real estate and gold more heavily than their forebears. On average Millennials report investing over 65% of their portfolio into more defensive assets (including cash), and less than 20% report having an allocation of over 25% of their wealth towards stocks. We may see an outflow from equity markets in the next few decades and a global wealth shift to other sources of investment.

We may also see a shift in the balance of wealth classes, as the influence of the generational transfer inflates demographics within the heirs of these trillions.

Figure 3: Demographic distribution of wealth

Source: Accenture, Federal Reserve

The chart above shows the discrepancy not just in total wealth, but also in demographic distribution. The two largest groups amongst Boomers are Affluent and High Net Worths, whilst Mass Affluent and Affluent are the two largest groups of their heirs.

When this wealth moves down a generation, we will likely see a greater weighting towards higher tiers of wealth amongst the Millennial benefactors of their parent’s inheritance.

Millennials have a 10% retirement savings rate, more than double that of their parents. They also avoid debt, holding approximately 15% less mortgage debt than Baby Boomers. And as we established earlier, they are not as active in the stock market.

Looking to tomorrow

There will always be question marks around this level of wealth transfer being almost exclusively tied to human behaviour and social preference. Maybe some adult children should be a little kinder to their parents, or maybe those parents will buy another jet ski out of some planned inheritance.

As members of the global investing ecosystem, the Great Wealth Transfer will inevitably affect us all. Investors need to look over the next few decades to consider how the consumption and spending preferences of the two generations differ.

It seems likely that Millennials will not seek to imitate the behaviour or style of their parents, and we will walk blindly into the future not knowing where US$68 trillion will end up.

 

Max Pacella is a Relationship Executive, Partnerships at Mason Stevens. The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Mason Stevens is only providing general advice in providing this information. 

 

RELATED ARTICLES

Four ways to reduce the generation blame game

'OK Boomer' responses keep on coming

Responses to the 'OK Boomer' poll

banner

Most viewed in recent weeks

Super changes, the Budget and 2021 versus 2022

Josh Frydenberg's third budget contained changes to superannuation and other rules but their effective date is expected to be 1 July 2022. Take care not to confuse them with changes due on 1 July 2021.

Noel's share winners and loser plus budget reality check

Among the share success stories is a poor personal experience as Telstra's service needs improving. Plus why the new budget announcements on downsizing and buying a home don't deserve the super hype.

Grantham interview on the coming day of reckoning

Jeremy Grantham has seen it all before, with bubbles every 15 years or so. The higher you go, the longer and greater the fall. You can have a high-priced asset or a high-yielding asset, but not both at the same time.

Whoyagonnacall? 10 unspoken risks buying off-the-plan

All new apartment buildings have defects, and inexperienced owners assume someone else will fix them. But developers and builders will not volunteer to spend time and money unless someone fights them. Part 1

BHP v Rio v Fortescue: it's all about the iron ore price

Don’t look at an earnings forecast or a DCF valuation or a broker target price for a mining company. Share price forecasts are only as good as the commodity price assumptions they are based on, and they are a guess.

Should investors brace for uncomfortably high inflation?

The global recession came quickly and deeply but it has given way to a strong rebound. What are the lessons for investors, how should a portfolio change and what role will inflation play?

Latest Updates

Shares

Five stock recoveries not hanging on COVID predictions

The focus on predicting the recovery from the pandemic is the wrong emphasis. Better to identify great companies benefitting from market changes over a three- to five-year horizon with or without COVID.

Exchange traded products

Peak to peak, which LIC managers performed during COVID?

A comprehensive review of dozens of LICs shows how they performed in the crucial 'peak to peak' of COVID. This 14 months tested the mettle and strategies of a sector often under fire, with many strong results.

Property

Blink and you missed a seismic shift in these stocks

Blink and it happened. If announcements in this sector were made by a producer of iron ore, gas, copper or some new tech, the news would have been splashed across the front pages. Have we witnessed a major change?

Worries over the planned proxy rule changes in Australia

We do not agree with Treasury’s suggestion that institutional investors are overly influenced by the research provided by proxy advisors. Here's how active ownership works to serve the client's best interests.

Economy

How to invest as inflation fears fade

There are many reasons why the worries about inflation are overstated and investors should protect their portfolios against falling inflation rather than rising. The economy is completely different to the 1970s.

Economy

A tale of the inflation genie, the Fed and the RBA

The inflation genie is still in the bottle. While wage growth remains low and the US Fed maintains current settings, we should expect the RBA's accommodatory approach to continue.

Strategy

Not so plastic fantastic: solving the single-use pandemic

At least 8 million tonnes of plastics leak into the ocean each year, equivalent to one garbage truck every minute. This is expected to double by 2030. Such pollution brings risks and opportunities for many companies.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.