Unlocking Generational Wealth

The years that followed World War II represented a period of remarkable prosperity for many Americans.

By 1946, the U.S. had stepped out of the shadows of the Great Depression and two costly global conflicts. It entered an era of surging suburban development, job growth and broad economic opportunity.

Buoyed by an overall sense of confidence and improved fortune, American birthrates surged between 1946-1964, causing the country’s population to increase 54% from where it stood before World War II.¹

Baby boomers, as they became known, rode the wave of broad abundance to amass significant wealth. American baby boomers hold about $431 trillion in privately owned assets and comprise more than half of all U.S. equity and mutual fund wealth.²

Next year, the youngest baby boomers will turn 60 and the oldest are pushing 80, meaning many of this generation are approaching retirement or have already reached it. They are also passing their fortunes on to their children and other heirs, spurring a wealth transfer expected to reach $72 trillion to younger generations and another $12 trillion to charities by 2045.³

This shift requires careful planning on the part of those who transfer their assets and those receiving them to protect the value of their investments.

For Boomers, Generation X and Millennials, Planning Is Paramount

Baby boomers can thank the stock market, at least in part, for a sizable portion of their wealth. The S&P 500^® Index gained 2,800% — a conservative estimate — since 1983, offering a dramatically increased value to the retirements and investments of baby boomers who came of age and worked during this period.

Stocks helped propel the average baby boomer's net worth to $1.2 million. That’s more than 12 times the net worth of millennials, according to market research firm Cerulli Associates.

As baby boomers make plans to pass on generational wealth, there’s both a gap in knowledge and communication with their heirs. About half of wealthy boomers don’t think their children are prepared to receive an inheritance. A third haven’t even sat down with their children to discuss the matter.⁴

It isn’t incumbent solely on well-heeled baby boomers to prepare for the complicated financial arrangements of inheritance. Roughly half of Americans have no retirement savings and most millennials haven't sought help from a financial advisor.⁵

That help might have suggested millennials increase their exposure to financial assets that those of their generation have largely avoided. This includes considering locking into the highest bond yields in years and being positioned to take advantage of the compounding effects of the stock market. As they do that, they should build up their liquid savings to avoid drawing on their retirement accounts and the penalties and taxes that go with it when emergencies happen.

Somewhat fortuitously, the wave of wealth transfers will help some members of younger generations close wide gaps in their retirement funding.⁶

What the Great Wealth Transfer Means for Markets

Baby boomers benefited from their investments in the stock markets, but younger generations have less faith that they can achieve above-average returns with a portfolio of stocks and bonds. Investors between the ages 21-42 have just 25% of their portfolios allocated to stocks.

This younger generation of investors expresses more interest in alternative investments like private equity, commodities, real estate and cryptocurrencies. They also lean more toward sustainable investing than older investors.⁷

Right now, just 20%-30% of millennials use a financial advisor. There’s a chance that as millennials grow older, their preferences in investments may change, or they may receive advice that turns them toward traditional assets. That said, younger investors have an affinity for fintech over a traditional bank or wealth management firm, so roboadvisors may supply a sizable chunk of that advice.⁸

Navigating the Shift

Older generations are often flummoxed by the habits and preferences taken up by those in younger generations. Younger people often don’t know why their forebears made the decisions they did and poke fun at their inability to adapt to newer technologies and ideas.

Navigating these generational differences will affect the wealth that baby boomers begin leaving behind during the next 20 years.

Younger generations have an opportunity to catch up on their retirement funding from this wealth transfer, but the assets and tools they use will be different from those used by baby boomers. They need to take care when using technology and new ways of getting financial advice that will shape how they handle this influx in assets.

Meanwhile, it’s important for baby boomers to sharpen their understanding of wills, trusts and other mechanisms to guide the shift in wealth to younger investors.

It all requires careful planning from all involved, ranging from the boomers providing wealth, the beneficiaries who accept it and those who help guide the process along.