Nirav Shah
Wealth of Geeks
Over the next two decades, the term “inheritocracy” will likely become familiar to more people worldwide. In the United States, an estimated $70 trillion will be transferred from the baby boomer generation to millennials during this period. Many baby boomers in America are arranging to pass their wealth on to the next generations through wills, trusts, property purchases, and gifts.
There are approximately 73 million baby boomers in America, and the youngest are now on the verge of turning 60. The oldest American baby boomers are almost 80 years old right now. Many of these people will leave behind thousands of dollars, family businesses, homes, and other assets for their heirs.
In 1989, after adjustments for inflation, America’s total family wealth was approximately $38 trillion. By the end of 2022, this amount has more than tripled to $140 trillion. The boomers have certainly benefited a great deal from decades of price growth in financial assets as well as real estate.
Since 1983, the average house price in the U.S. has increased by almost 500 percent. Also, per the benchmark S&P 500 index measurement, since 1983, the U.S. stock market has gone up by more than a whopping 2800 percent.
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Where the assets are going
According to Cerulli and Associates, a financial market intelligence firm, $84.4 trillion in assets will be passed down through 2045 by baby boomers and the Silent Generation preceding them. Out of this amount, $72.6 trillion will be transferred directly to heirs. Interestingly, 42% of the Great Wealth Transfer will involve ultra-high-net-worth households belonging to the country’s top 1.5%.
A 2022 survey by Hearts & Wallets found that out of nearly 6,000 households surveyed, 60% had planned to receive or leave inheritances such as cash, investments, and property. This figure included 54% of households with investable assets less than $100,000.
This wealth transfer will likely benefit a large segment of upper-middle-class millennials who will inherit lump sums. Though some parts of people’s overall economic lives may remain untouched, this shift of wealth will undoubtedly impact America’s housing, healthcare, education, labor markets, financial markets, and more.
Many experts feel that this wealth transfer between generations will likely significantly impact America’s economy. Along with boomers passing on their wealth and millennials enjoying their inheritance, they must also deal with some challenges.
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Small businesses could face the heat
As they get older, more and more baby boomer business owners are contemplating their retirements. Many of these businesses will have to change hands or close down soon. Latest statistics from the U.S. Census Bureau mention that the boomers own 2.34 million small businesses across the nation. These businesses employ over 25 million people.
However, a recent survey by Wilmington Trust reveals that over 58% of baby boomer small business owners still need to complete or contemplate any succession plan for the near future. This lack of planning will likely have dire consequences for the families employed by these small businesses. This may indirectly threaten their millions of suppliers, vendors, independent contractors, partners, gig workers, etc.
Quite significantly, many millennials have little interest in taking charge of their family businesses. Having witnessed the sacrifices made by their parents and grandparents to run their businesses, they are keen to pursue alternative careers without bearing the same burden throughout their lives. According to a recently published report, a high percentage of this generation prefers jobs in media, healthcare, operations, and technology rather than running family-owned businesses.
The situation must change to save baby boomer owners’ businesses from extinction. While the aging boomers should plan early and efficiently for a seamless transition, the millennials should also change their mindset about running family businesses. Many companies facilitate loans and business credit cards to help young Americans take over cash-flowing trades.
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The great wealth transfer: Are Americans ready for it?
Undoubtedly, inherited wealth may provide a much-needed financial lift for many Americans. Still, the new New York Life Wealth Watch survey findings suggest that many Americans need to be more confident about their ability to manage funds. According to this survey, only 42% of adults likely to inherit funds from their parents are comfortable handling this passed-down wealth. Also, 58% of respondents feel that inflation will have a small to medium impact on the amounts they receive.
Despite this transfer of life-changing wealth, many experts feel that the financial progress of average Americans will continue to be impacted by factors such as inflation, unexpected expenses, and growing credit card debt. Adults perceive credit card debt, healthcare costs, and lack of emergency savings as the biggest obstacles to their financial well-being. Out of the 42% of Americans with credit card debt, approximately 35% have experienced an average increase of this debt of $4,156.91 in the last year. Therefore, even after inheriting wealth, many Americans will be living frugally to achieve financial security.
According to the same survey, on average, adults expecting to inherit from their parents or grandparents anticipate receiving wealth amounting to $ 738,724.23. The survey also reveals that the top three ways they plan to use this wealth include paying off their debt, supplementing retirement savings, and preserving it for their children.
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Ways to prepare
At the end of 2020, the baby boomer generation held a staggering 57% of assets and wealth in the U.S. By comparison, millennials had only 3% of America’s entire wealth. Therefore, over the next two decades, there is likely a massive increase in the amount of wealth to be held by this younger generation. They can prepare themselves for the historic wealth transfer to make this transition smoother.
Research indicates that most generational wealth tends to deplete significantly by the time it reaches the third generation. With a clear financial plan, it is easier for the younger generation to manage this sudden influx of trillions of dollars.
Therefore, in-depth financial planning of inherited wealth is essential before receiving it.
Another critical step to prepare for this wealth transfer is to remain aware of the current financial condition and build a well-informed long-term plan for improving individual net worth. It is also vital for all recipients to stay up-to-date with all investment trends during the transition period. To ensure that the wealth continues to grow during and after the transition period, recipients must monitor different financial market sectors and educate themselves on all key investment options.
Finally, with many millennials receiving an inheritance, there may soon be a wide range of capital-raising opportunities for those seeking investment for their startup ventures. This scenario will likely create excellent opportunities even for people who will not inherit directly but are perfect business planners. Therefore, this is a great time to think about entrepreneurial ideas, investment approaches, and new career opportunities following the interests of wealth-inheriting millennials.
