“No Issue looms larger for the financial advice industry than demographics and the aging of the baby boomers.”
-Andrew Osterland: CNBC.com
Recently, enormous volumes have been written about the coming transfer of wealth which is likely to occur in the next several years, as wealthy baby boomers begin to die and transfer their wealth to their kids. The media has adopted this topic as a popular theme, and I have seen hundreds of articles like the one below from Andrew Osterland, which proclaims that:
Over the next several decades, the biggest and wealthiest generation in U.S. history will transfer roughly $30 trillion in assets to their Gen X and millennial children, and if studies are accurate, most of those children will promptly fire their parents’ advisors. [from: Advisors brace for the $30 trillion ‘great wealth transfer’]
Indeed, this coming wealth transfer event has become a huge focus for the financial advice business, which is scrambling to figure out how to court the Millennial and Gen X children who stand to benefit from these inheritances.
While it may be very well true that this giant transfer of wealth is coming, I suspect that those wealthy baby boomers themselves may be thinking – “Not so fast, Junior!” I’m sure that they are not too wild about a discussion of what is going to happen to all of the money they worked a lifetime to accumulate – when they are dead. But there are some other important reasons why this flood of articles may be misleading us all:
Boomers are not convinced their kids are ready for their Inheritance
It seems there is a noticeable trend among wealthy baby boomers who have reservations and concerns about the work ethic, responsibility, and maturity of their Gen X and Millennial children. There has been a rising sentiment among this generation that they may just leave some or all of their wealth to charity instead.
Boomers expect to live a much longer time!
As I recently wrote in my blog, What is Your 100 Year Plan?, we may all be seriously underestimating the life expectancy advances that are coming in the next 10 years, which may cause a serious recalibration in boomers’ thinking about retirement and cash flow planning. In short, the odds may be rising that these wealthy Boomers may actually live long enough to spend all of their kids’ inheritance!
My colleague Bill Bachrach points out that today, it is quite common for men and women in their 70’s and 80’s to finish the Ironman Triathlon within the 17 hour cutoff time. He writes:
Medical and scientific breakthroughs will continue to extend life while delaying the effects of aging. Remember, the future is not linear: it’s exponential. What if people added another 20 or 30 healthy years to their lives? What if it’s more? Then what happens to your financial projections? Instead of leaving money to their kids, will they buy a replacement kidney or heart or genetic treatments to reverse the effects of aging? Or will they simply need all of their money to continue their lifestyle? Will people go back to work at 90? If 90 then is like 50 now… that’s not a problem, right?
Can you see how the prospect of greater longevity will completely disrupt our long-standing assumptions of the planning, management, and transfer of wealth? The Baby Boomers and the older Gen Xers will likely control most of the money for much longer than expected. Sorry, young Gen X and Millennials, you’re going to have to make your money the old-fashioned way: earn it. To make it even more interesting, longevity favors the wealthy. As Josh Zumbrun reported in a 2014 Wall Street Journal blog: “Economist Barry Bosworth at the Brookings Institution crunched the numbers and found that the richer you are, the longer you’ll live. And it’s a gap that is widening, particularly among women.”
If Mom and Dad don’t spend it, then Mom will!
Another important trend, which is related to the possible boom in longevity to come, is the relative longevity differences between women and men. Historically, women tend to live roughly 5% longer than men on average. Today, that means that life expectancy at birth for women is 83.5 years, and for men 79.5 years, for a difference of 4 years. However, as longevity increases for everyone, this gap in the number of years of life is likely to continue to increase if this 5% relationship continues. In particular, among people in the top 25% of incomes and wealth, the longevity of women is accelerating even faster.
The outcome of this? For most families, there are very good odds that wives will outlive their husbands by 5-10 years – years during which they will continue to spend all of that wealth that most observers are expecting to be inherited by the next generation.
In our last article, What is Your 100 Year Plan?, we focused on the possible impact of exponential growth in life expectancy, and the need for baby boomers to consider using a longer life expectancy when planning for their retirement income security. However, this second point also has important planning implications for most couples and families as well. The fact is, that millions of wealthy women are likely to outlive their husbands, and to be faced with a period of 5, 10 or 20 years during which they will be faced with the task of managing their money, and making important investment and financial planning decisions. Many of these women will be well prepared for this responsibility, and have taken a leadership role in managing the family’s money already. However many will not be prepared, and will be thrust into unfamiliar territory, taking over a responsibility that they have no experience managing.
Perhaps the financial services industry would be well served to pay better attention to creating engagement with the women who are likely to someday become their primary clients, instead of the “Gen X’ers” who may eventually inherit the family fortune. In the meantime, some advice for our married female readers who aren’t currently involved in managing the family’s finances…be aware that there may come a day when your husband is gone, and you will need to become the “Family CFO”. If you are not already preparing for that job, make sure you start. Don’t skip the meeting with your financial advisor – make sure that you know and trust him or her. This may be a person you need to count on during one of the most difficult times of your life, so it’s a good idea to make sure that you are comfortable working together now.