Dispelling myths about the ‘Great Wealth Transfer’
Reports about the Great Wealth Transfer often make eye-opening assertions about the scale of assets set to pass down to younger generations, and how investment trends are likely to change as a result. It may be worth taking much of this with a grain of salt.
With an estimated USD124 trillion in assets set to be transferred from older generations to younger ones in the US by 2048, plenty of analysts have speculated about the impact of what is commonly called the Great Wealth Transfer on investment markets.
But while there are indeed differences in the investment styles of Baby Boomers, Millennials and Gen Z, the generational shift in wealth management may not be quite so dramatic.
For one thing, the rising amount of money passing to the next generation is a function of overall household wealth. Thanks to rising home and stock prices, this reached a high of USD163.8 trillion in the second quarter of 2024.
Jim Grubman, a family wealth consultant and author of several books on the topic, points out that around USD1.5 trillion to USD2 trillion is likely already being transferred each year.
“The proportion of annual transfer remains at around 1% of total wealth per year,” said Grubman, citing a figure that is in line with the historical average. “And compared to newly created wealth, inherited wealth is still only a small secondary figure that is naturally distributed from created wealth over time.”
Highly concentrated
It’s also worth cautioning that the Great Wealth Transfer — as with wealth in general — will be highly concentrated among a minority of the population. In the US, 25% of assets are held by 1% of the population, and almost 80% is held by 20%.
According to the Federal Reserve’s Survey of Consumer Finances, only one in five Americans have received any inheritance. Of the people who have, the average sum is USD266,000, but that figure is unlikely to be representative for most.
Teresa Ghilarducci, a labor economist and expert in retirement security, said that after discounting the wealthiest 10% of Americans, the median inheritance of the remaining 90% is close to zero.
Moreover, based on her calculations using data from the University of Michigan Health and Retirement Study survey, median wealth among those aged 51 to 56 — a group she describes as “liminals” on the verge of retirement — only increased among the top 10% between 1992 and 2016, while decreasing among the rest.
The calculations, published in the article “No Rest for the Weary: Measuring the Changing Distribution of Retirement Wealth in the United States,” show that the bottom 90% of this group had less wealth in 2016 than in 1992. In other words, for the vast majority, the Silent Generation were better off approaching retirement than are Baby Boomers, because the latter “took on so much mortgage debt and home equity loans,” said Ghilarducci. “So, even though Boomers were working and saving and buying assets in the biggest period of asset growth in our nation’s history, the debt outran that asset growth.”
Ghilarducci said that because of this, “the majority of people get nothing from their parents, and a significant minority of adult children are giving money to their parents.”
Stacy Francis, President and CEO of Francis Financial, added that “a lot of heirs are overestimating what’s going to come to them in their pocket from the Great Wealth Transfer, and may be relying on that to get them through their golden years. I would say that’s not a very safe place to be.”
According to Northwestern Mutual's 2024 Planning & Progress Study, one third of millennials expect to receive an inheritance, but only 22% of Boomers expect to leave one (see Figure 3). Of those that are expecting an inheritance, half consider it “critical” or “highly critical” to their financial security.
One reason the children of Boomers may have inflated expectations of what they will inherit, said Ghilarducci, is that people look at the value of their parents’ houses on property websites and assume that this is the equity. “What they don't know is that older people are going into retirement with more mortgages than they ever had before.”
This is compounded by the tendency for people to avoid discussing and preparing their wills and estate plans.
Moreover, a good chunk of the wealth that the bottom 90% do have could go to medical care or nursing homes, in light of increasing longevity and healthcare costs (see Figure 4), noted Kristine McManus, Chief Advisor Growth Officer at Commonwealth Financial. “People aren’t dying at 65, they’re living to 90 and beyond. I have an aunt who’s 99. She needs a full-time health aide with her 14 hours a day.”
No single approach
What of the heirs who do inherit? Will they be satisfied with the conventional 60/40 allocation to stocks and bonds like their forebears?
Gen Z are generally seen as having the biggest appetite for risky investments. And the market’s returns since they came of investing age have perhaps vindicated a high-risk approach, said Jack Manley, a Global Market Strategist at JP Morgan Asset Management.
“Gen Z has had the best equity market experience of any generation. If you started investing in 2021, let’s say, you had a great year. Then you had a great year in 2023, you had an incredible year in 2024. It feels like you can't lose money.”
Of course, younger people’s appetite for risk could moderate as they grow older, said Manley, who is 33 and unmarried with no children. “My financial needs are not complex, and when it comes to taking risk, it’s only me I have to worry about, and I know that I have another 30 or 40 years of working, then hopefully 20 or 30 years living beyond that.”
As Gen Z and Millennials take on more responsibilities, they are likely to become “a lot more sensitive to risk,” said Manley.
He also cautioned against thinking of these groups as one, explaining that within them there are individuals at opposite ends of the risk preference spectrum.
Several studies, including the 2022 Bank of America Private Bank Study of Wealthy Americans, infer that because the portfolios of younger investors currently have a higher share of alternatives, sustainable investments and cryptocurrencies than those of older investors, the Great Wealth Transfer will naturally result in a steady rise of these asset classes.
But again, these preferences may not endure when Gen Z and Millennials finally receive their inheritances, given that this happens for the majority of Americans when they are in their 50s or beyond, according to the Fed’s Survey of Consumer Finances.
Still, Manley suggested that it was wise for financial advisors to offer clients the option of including social or environmental factors in portfolio construction. “It has to be in your toolbox if you want to be able to cast as wide a net as possible and attract more potential clients,” he said.
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