Unlocking Generational Wealth

After World War II, the U.S. entered a period of strong economic growth marked by suburban expansion, job creation and rising prosperity. Between 1946 and 1964, the country also experienced a baby boom that increased the population by 54% compared to prewar levels.¹

In the following decades, baby boomers rode a wave of abundance to amass significant wealth and now hold about $78.55 trillion in privately owned assets. They hold more than half of the country’s wealth, and they’re passing it on to younger generations in what’s called the great wealth transfer.²

What Is the Great Wealth Transfer?

Baby boomers now range from their early 60s to nearly 80, with most nearing or at retirement age. Some are also passing their fortunes to their children and other heirs, spurring a wealth transfer expected to reach $105 trillion to younger generations and another $18 trillion to charities by 2048.³

This shift requires careful planning by both those transferring their assets and those receiving them to safeguard the value of their investments.

With an average net worth of $1.6 million, baby boomers can credit the stock market for a sizable portion of their wealth.⁴ The youngest boomers turned 18 in 1982. With an average annual return of 12.2% since then, a one-time $10,000 investment in the S&P 500^® Index with dividends reinvested would be worth over $1.5 million today.⁵

Planning for Generational Wealth Transfer

As baby boomers prepare to pass their wealth to the next generation, there’s a noticeable gap in knowledge and communication with their heirs. About half of wealthy boomers believe their children are unprepared to inherit, and a third haven’t discussed the topic with them.⁶

It isn’t solely the responsibility of affluent baby boomers to manage the complex financial arrangements of inheritance. About half of Americans lack retirement savings, and fewer millennials own retirement accounts. Most haven’t sought help from financial advisors.⁷

Advisors might suggest that millennials increase their exposure to financial assets that many people in their generation have largely avoided. This could entail developing a diversified investment strategy that seeks to take advantage of the potential compounding growth effects of the stock market.

As they pursue these strategies, they should also focus on building up their liquid savings for emergencies to avoid tapping into their retirement accounts and facing the accompanying penalties and taxes.

Fortunately, the wave of wealth transfers will assist some members of younger generations in closing significant gaps in their retirement savings.⁸

What Does the Great Wealth Transfer Mean for Investors?

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. Although the numbers have risen recently, only 9% of millennials and Generation Z investors own pooled assets such as ETFs and mutual funds. However, 22% own individual stocks.⁹

This younger generation of investors expresses more interest in alternative investments like private equity, commodities, real estate and cryptocurrencies. They also tend to lean more toward sustainable investing than older investors.¹⁰

Currently, only a quarter of millennials use financial advisors. As they age, their investment preferences might shift, or they might receive advice that leads them toward traditional assets. However, younger investors prefer fintech over conventional banks or wealth management firms, so roboadvisors could provide much of that advice.¹¹

Navigating Generational Wealth Transfer

Older generations are often puzzled by the habits and preferences adopted by younger generations. Younger people often don’t understand their elders’ decisions and mock their inability to adapt to newer technologies.

Navigating these generational differences will affect the wealth that baby boomers leave behind over the next 20 years.

Through this wealth transfer, younger generations will have a chance to catch up on their retirement savings. However, they will use different assets and tools than baby boomers. They must be careful when using technology and new ways of getting financial advice, as these will influence how they manage this influx of assets.

Meanwhile, baby boomers need 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 everyone involved, including the boomers providing wealth, the beneficiaries who accept it, and those guiding the process.