You may have heard of the "Great Wealth Transfer" by now. Economists, financial experts, and journalists alike have been hyping up what could be the single largest transfer of wealth in our history thus far. But, is this concept grounded in reality? Or, is the Great Wealth Transfer a myth?
As is the case for many projections, there is no single straight answer. If you have a beloved Baby Boomer in your life, find out how much you might stand to inherit, and just how much you may need to temper expectations.
Understanding the Great Wealth Transfer
'The Great Wealth Transfer' is a term that describes the massive transfer of assets that will supposedly exchange hands in the coming years. The Baby Boomer generation, once the largest generation in the U.S., is reaching the age of handing over the reigns.
According to the Federal Reserve, this generation has amassed the greatest amount of wealth in history. Americans aged over 65 (roughly 17 percent of the current population) own $96.4 trillion to $120 trillion, depending on various reports. That's half of the nation's wealth.
The assumption so far has been that as Boomers pass away, they will transfer their wealth to younger generations, mostly in the form of inheritances.
The New York Times and other major news sources have forecasted this wealth transfer a number of times over the past few years. Understandably, any reader from younger generations may begin to look forward to a massive windfall due to them in time which could help them catch up financially.
But it isn't that simple.
A Business Insider article calls this out as a 'boy who cried wolf' type of scenario. Next, we'll analyze reasons for which many Americans won't benefit from what some have heralded as the 'Greatest Wealth Transfer.'
Greatest Wealth Transfer: May be a Myth After All
Unfortunately, some financial experts are pointing out that while the term "Great Wealth Transfer" may be accurate technically, reports are inflating the benefits it will bring to the general American public. For most, it will be just a myth.
Here are some reasons why:
Long-term care costs
Increasing costs of living
The concentration of wealth
The Price Tag on Long-term Care
While it is true that Baby Boomers have amassed the greatest amount of wealth in history, they're also living longer, but not necessarily in the best quality of health. According to the National Library of Medicine, the "problem" of caring for aging Baby Boomers will peak by 2030 and our socio-economic structures are not built to support it.
The average monthly cost of full-time care ranges from $4,600 to $9,000, depending on the type and intensity of care. Medicare typically does not cover these costs. Medicaid will cover 62% of these costs, but only specific economic groups qualify.
What this means is that even those who are lucky enough to expect an inheritance, they may not inherit as much as they think they will. Many aging seniors will be forced to dip into their nest egg to cover the costs of long-term care, unless the government introduces programs that provide significant financial support for more aging Americans.
Increasing Cost of Living
Adding to the challenge of long-term care costs is the ever-increasing cost of living. Together, these paint a tough reality for potential inheritances.
In today's world, where essentials like housing, healthcare, and education come at a high price, there's less room for saving and investing. It's not just the direct costs that impact inheritances; the loss in potential investment growth worsens the situation.
Further exacerbating the issue is the desire of seniors to spend the money they worked so hard to save. In a report by Business Insider, a wealth management advisor explains that older Americans are choosing quality of life over preserving resources for their children. Many Boomers plan to give (in the form of inheritance) "whatever is left over."
As a result, future generations might receive a much smaller financial legacy, or none at all. This highlights a harsh truth: the growing living expenses and long-term care costs pose a significant obstacle to preserving wealth for the future.
The Concentration of Wealth
It's also important to question who owns this wealth, and if you fall into the lucky group that stands to inherit from them.
According to the University of Pennsylvania, you only have a 7.4 percent chance of receiving an inheritance in any five-year period. However, this percentage increases as your wealth increases. For the top 5 percent, that percentage increased to 11.2 percent. Wealth also accounts for how much your inheritance might be. For the top 1%, the average inheritance amount received was $719,000. For the bottom 50%, the number goes down to $9,700. In other words, for the dominant majority of Americans, their inheritance is just 1.3% of what the wealthiest Americans inherit.
Yet again, the wealthy stand to get wealthier while leaving everyone else behind.
Possible Impacts on Younger Generations
Millennials and Gen Z have the daunting task of prepping for their financial futures. Understandably, this can be incredibly difficult when you feel uncertain of whether or not you can count on help from Grandma or your favorite uncle. Anticipating an inheritance isn't just about money; it influences how people view their finances. Headlines that continue to amplify a narrative that a huge inheritance is coming may mislead many young Americans to be overly optimistic that they'll come across a windfall at some point in the future.
If you stand to inherit money or other property from a loved one, your mission is clear: proactive engagement, clear communication, and a well-informed financial strategy. It would be helpful to have candid conversations with your aging loved ones regarding their financial status and how much they realistically plan to pass down.
Money talks can be touchy, so be sure to check out our guides on how to broach the subject tactfully to promote productive conversations around estate planning and inheritances. With strategic foresight, you can help older generations safeguard the wealth intended for future generations.
An Estate Plan to put your Financial Strategy in Place
The impending Great Wealth Transfer has stirred a mixture of anticipation, skepticism, and urgency. It is a watershed moment for individuals, businesses, and the government. It implores anyone, regardless of their age, to address the topic of wealth.
The wealth transfer may not be as straightforward as it's often reported upon; for many, it'll sadly be just a myth. Counting on an inheritance therefore isn't a sound strategy. It's a gamble at best. This calls for proactive financial management and responsibility across generations. The Great Wealth Transfer, real or myth, compels us to take charge of our financial legacies, ensuring that whatever we do – inherit or not – we build and share in a way that strengthens the financial outlook of the future.
Regardless of your age, old or young, this is a call to action. In addition to drafting out your financial roadmap, be sure to get your estate plan in place. For aging Americans, it would be a travesty if any wealth you've built over decades of hard work were left up to chance. For younger Americans, you can learn from mistakes of the past and take your financial and legal future by the horns. Trust & Will offers value to every American at any stage. Our affordable estate plans empower you to get your Will and/or Trust in place so that you can have peace of mind and gain more confidence.
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