Planning for Personal Wealth Transfer
Over the next twenty five years, an estimated $68 trillion of wealth will change hands between generations as Baby Boomers leave assets to their heirs, according to data from Cerulli Associates. [1] This phenomena has been named “The Great Wealth Transfer”, and with an estimated ten thousand Baby Boomers retiring every day, the changes in the economy as a result of the wealth transfer are beginning to take place. Considering the level of wealth in America, the $68 trillion to be transferred between generations can be hard to fathom - there is a certain denominator blindness that one may be subjected to when contemplating a number so large. The magnitude of this transfer is put into context with recognition of the fact that “for the first time in U.S. history a generation has lived better, more prosperous lives than its children. And it’s not even close. At time of writing the baby boomers held approximately 57%t of all the wealth and assets in the U.S. economy. By contrast their children, the millennial generation, owned roughly 3%”. [2] As the Great Wealth Transfer begins, it will become increasingly crucial for individuals on either side of the transfer to ensure that an appropriate plan is in place.
Although many millennials can anticipate a substantial windfall of assets inherited from Baby Boomers in the coming years, a layer of complication with respect to estate planning lingers, as our life expectancy continues to rise. A dependable plan anticipates the likelihood that one will live for a long time in retirement. Per the Social Security Administration, a least one member of a sixty-five year old couple has a 9 in 10 chance at living beyond the age of 80. [3] With this in mind, the importance of estate planning is highlighted, as many will need to spend an increasing portion of their assets on
healthcare through later years, which could erode the principle of their nest egg. Other retirees may wish to begin distributing their assets before they pass, commonly for the benefit of seeing their heirs use assets for the betterment of their own lives. Another goal of retirees who wish to distribute a portion of their assets before they pass is their desire to provide guidance and advice to their heirs in relation to how they feel these assets would be put to use best.
In determining an appropriate level to distribute while a retiree is still living, it is important to acknowledge the realities of healthcare costs as we age. Data released by the Employee Benefit Research Institute estimates that “out-of-pocket costs for an average 65-year-old retiree on traditional Medicare are projected to more than triple from around $5,300 this year [2020] to over $17,000 by age 95”. [4] The inflation rate of healthcare has historically outpaced US inflation as well. The long term average healthcare inflation is 5.26%, versus the average long term US inflation rate of 3.21%. [5] Therefore not only are healthcare costs becoming more expensive compared to average inflation, retirees need more healthcare services to begin with. This can be a troublesome subject to think about, but these realities must be considered when a retiree is determining the level of assets to distribute before one passes.
Once assets have been transferred, the variables at play are not reduced, rather they are similarly transferred to other factors that must be considered with respect to inheritance planning. Referring back to the statistic stating wealth share by generation in this country, the generation set to inherit assets in the Great Wealth Transfer owns just 3% of financial assets compared to that of Baby Boomers at 57%. Such a disparity presents the potential for misguided or myopic financial decisions. This is not to argue that the generation to inherit these assets are not financially literate, but rather to suggest that for many, their inheritance will be the first instance of financial “breathing room”, where income and assets are not solely dedicated to student loan repayment or other various expenses and debt servicing.
For many, it may be beneficial to recognize this possibility ahead of time. Establishing a financial plan ahead of time that appropriately categorizes how inherited assets should be put to work may prove to be beneficial in the long run. In many cases this includes designating a certain tranche of assets for leisure, or to use however one chooses. Part of an effective plan is room for error and room for discretionary spending if appropriate. The benefits of compounding are ever-apparent, and as Charlie Munger has reiterated, the first rule of compounding is to never interrupt it unnecessarily. There is also benefit to improving one’s life in the near term if possible - to use inheritance to service some debt or put towards a down payment on a home.
All of these factors will be crucial as the Great Wealth Transfer continues throughout the next few decades. Taking a proactive stance in establishing arrangements with your family can prove to be an advantage, not only for the sake of peace of mind but also to establish cohesive expectations between all parties within a given family. The concept of surveying the benefits of distributing some assets while living versus solely estate planning for after one passes is worth considering in many cases, but there are a handful of variables to identify in making the decision to do so. Ultimately, while each family set to transfer assets in this time operates under different circumstances with different inputs and expectations, there is a unique solution that can be met to accommodate all parties best, and commonly it pays to develop a thorough plan in anticipation of the future.
Disclosures & Sources:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often neutered for investments in emerging markets. Asset allocation does not ensure a profit or protect against a loss.
Investing in mutual funds involves risk, including possible loss of principal. Find value will fluctuate with market conditions and it may not achieve its investment objective.
Stock investing includes risks, including fluctuating prices and loss of principal. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect principal.
The economic forecasts set forth in this material may not em develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Financial Consultants at Vintage Wealth Advisors are registered representatives with, and securities offered through, LPL Financial, Member FINRA/SIPC. Investment advice and financial planning offered through Financial Advocates Investment Management, DBA Vintage Wealth Advisors, a registered investment advisor. Financial Advocates Investment Management, Vintage Wealth Advisors, and LPL Financial are separate entities.
CNBC - What the 68 Trillion Dollar Great Wealth Transfer Means for Advisors
Yahoo - What the Great Wealth Transfer Means for the Economy
Social Security Administration, Period Life Table, published 2019
Employee Benefit Research Institute, January 2020 Consumer Expenditure Study, JP Morgan Analysis
YCharts - Indicators, US Health Care Inflation Rate, Graph , YCharts - Indicators, US Inflation Rate, Graph
