Spending Their Inheritance?

 Apparently, Baby Boomers have some ‘splainin to do.

Yes, after decades of being blamed for everything from the demise of defined benefit pensions to the price of housing, Boomers are now being castigated for something else: spending the money that their children were (apparently) counting on inheriting.

Indeed, there’s been a lot of talk about the so-called “Great Wealth Transfer” — and lately a fair amount of consternation that Boomers might actually spend some of that wealth before they die.

Which got me wondering: How much did the Boomers actually inherit from their parents?

Turns out, for most, not all that much.

Back in 2011, researchers at Boston College’s Center for Retirement Research[i] took a specific look at that question. They estimated that about two-thirds of Boomer households would ultimately receive an inheritance.

And that median expected inheritance was ... (just) $64,000.

Now, $64,000 is certainly nothing to sneeze at. But neither is it the kind of generational windfall suggested by much of the current discussion about the wealth Boomers are now supposedly “obligated” to leave behind.

And remember that was the median among those expected to receive an inheritance.

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Roughly one-third weren’t expected to receive any … at all.

An Inheritance ‘Average’?

Federal Reserve data[ii] provides some additional perspective.

Looking at inheritances received between 1995 and 2016 — a period during which many Boomers would have been receiving inheritances from their parents, btw — more than half, 55%, were worth less than $50,000. Another 30% were between $50,000 and $250,000.

Only about 6% exceeded $500,000, and just 2% topped $1 million. But those million-dollar inheritances accounted for roughly 40% of all the dollars inherited.

In other words, a relatively tiny number of enormous inheritances can make the overall inheritance “pie” look a whole lot bigger than the slice received by a typical family. And remember, even then they weren’t all that big.

So, what’s got everyone so stirred up?

As it turns out, Cerulli Associates — a credible source, but one whose projections often seem to run on steroids — recently estimated[iii] that an astonishing $124 trillion will transfer through 2048. Of that, $105 trillion is projected to go to heirs, while $18 trillion will go to charity.

Which means they estimate that nearly $100 trillion is expected to come from Boomers and generations older than them in what has been dubbed (drumroll, please) the “Great Wealth Transfer.”

But hold on a second. More than $62 trillion — half of that entire projected transfer — is expected to come from high- and ultra-high-net-worth households that comprise … just 2% of all households.

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At this point you should be saying to yourself, “could this be (yet) another one of those situations where an enormous aggregate number tells us considerably less about the experience of a typical American than the click-baiting headlines suggest?

Great Expectations?

But wait — there’s more!

Not all that wealth is heading directly to Millennials and Gen X.

Cerulli further estimates that some $54 trillion will first transfer “horizontally” between spouses, with more than 95% of those assets going to women. Nearly $40 trillion is projected to move to widowed women in the Boomer and older generations before eventually moving on to heirs or charities.[iv]

Which means the Great Wealth Transfer isn’t really a single transfer at all. And it certainly doesn’t mean that there’s a $124 trillion check waiting to be divided among America’s children.

Yet that enormous number seems to have helped create some enormous expectations.

We’ve seen stories about “SKI” — Spending the Kids’ Inheritance — and Boomers “indulging” in travel, second homes and experiences rather than preserving their assets for their children. There’s even a growing presumption that parents should transfer wealth sooner, when their children can make better use of it.

Honestly, my wife and I have done some of that with our kids. But there’s something odd about treating an inheritance as though it were an obligation — particularly when the generation supposedly “shirking” that obligation largely built its own wealth without receiving anything remotely comparable.

To be sure, Boomers benefited from some extraordinarily favorable economic circumstances: decades of rising home values, a remarkable bull market in equities, relatively inexpensive higher education (RELATIVELY, mind you) and, for some (though not most, mind you), traditional pensions. Timing matters, and they (we?) had some pretty good timing.[v]

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But they (we?) also saved, invested, paid mortgages, raised families — and accumulated much of the wealth we’re now discussing over decades. We did it despite wars, gas lines, stagflation. And let me point out, spending a fair amount of that on the kids now chomping at the proverbial bit of a potential inheritance.

Our parents generally didn’t leave us fortunes. Nor did we expect them to.

‘Will’ Power

None of this is an argument against leaving an inheritance.

Nor is it an argument against helping children or grandchildren while you’re still around to see the impact. Indeed, there are compelling reasons to do so if your circumstances and retirement security permit it.

But retirement planning has always had an awkward uncertainty at its core: You don’t know how long you’ll live, what markets will do, what inflation will be, or what health and long-term care might cost. And nobody wants to be a financial or physical burden on their kids if they don’t have to.

Telling retirees simultaneously that they must make their money last for an unknowable lifetime — and that they should feel guilty if there isn’t enough left over afterward — seems like an interesting, if conflicted, set of expectations.

So perhaps before criticizing Boomers for spending their children’s inheritance, we should remember how much inheritance most of them started with.

For a lot of them — most of them — the answer was pretty simple.

Not much.

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An inheritance is a wonderful thing to receive.

It just shouldn’t be a retirement plan. And it shouldn’t undermine one, either.

• Nevin E. Adams, JD

 

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[i] See How Important Are Inheritances for Baby Boomers? – Center for Retirement Research.

[ii] See Federal Reserve Board - How Does Intergenerational Wealth Transmission Affect Wealth Concentration? Accessible Data.

[iii] See https://www.cerulli.com/press-releases/cerulli-anticipates-124-trillion-in-wealth-will-transfer-through-2048

[iv] Wealth management practices, take note!

[v] Of course, they/we also lived through some pretty tumultuous market cycles.

Are Millennials’ Retirements ‘Doomed?’

Millennials have had a rough week of it, at least in the financial press.

First there was a report that they had established asset allocations that mirrored that of their grandparents (the respondents apparently never heard of a target-date fund). Then a separate survey that indicated they (70% of them, anyway) were ashamed to ask their parents for financial advice (we’ll set aside for a minute whether that would have been a good source), and then the pièce de résistance was a report that painted a pretty bleak retirement picture for a generation that “entered the workforce around the Great Recession, which began in late 2007, and experienced a difficult economy early in their careers. Now, they are confronting pandemic-related setbacks while trying to manage work-life balance.” 

Indeed, the only bright note for this group—identified as those born between 1981 and 1996 - was a report that said the retirement savings gap between genders in that demographic was a mere 23% (which, at $29,218 versus $23,715, doesn’t mean it’s adequate, but then we’re only talking about averages). 

Now, as a mid-range Boomer—who happens to be the parent of three Millennials—I can attest to the complexities of this generation of individuals, now said to be the majority of today’s workforce (I can also attest to the reality that they all hate the label “Millennials”). 

Of course, they’re not the “kids” such labeling tends to call to mind—the eldest are in the 40’s, after all.  But that’s the age when life’s biggest financial struggles come home to roost; college debt, home ownership, marriage, kids (and the prospects of THEIR college expenses), and—increasingly—the burdens of caring for their Boomer parents. In that sense, their experiences are comparable to the challenges their parents faced, though perhaps a tad later in life.

There are, of course, the economic and technological realities of their generation. At similar ages, odds are their parents were barely aware of the Internet, and “innovations” like smartphones, email and social media were not even glimmers of possibility beyond science fiction. Those influences are both empowering and debilitating, inflating expectations and fueling a certain peer pressure on a scale their parents couldn’t appreciate. 

That said, and despite the recent spate of negative press (giving Boomers a break[i]), I’m pretty sure that:

Millennials are saving for retirement—likely earlier, and at higher rates than you did when you were their age.

Sure, some of that is plan design—automatic enrollment was a rarity when their parents were coming into the workplace, and employers are increasingly coupling that design with contribution acceleration.  Moreover, immediate eligibility is increasingly popular (Vanguard’s 2023 How America Saves says 80% of plans now offer that, while the Plan Sponsor Council of America’s 65^th Annual Survey of 401(k) and Profit-Sharing Plans puts it at just over half). And yes, that can matter a lot if job turnover is high—but it’s an urban myth[ii] that Millennials turnover more often than Boomers did at their age.

IF they have access to a plan at work, anyway.

Millennials are likely better invested for their retirement than you are—“then” and now.

Okay, as with saving for retirement, surely some of this is plan design—notably the default investment in target-date funds (TDFs) or some other qualified default investment alternative (QDIA)—and their more recent hire date. While data shows that TDF use varies with participant age and tenure, reports pretty consistently indicate that younger participants are more likely to hold TDFs than older participants (not so much due to their age, but due to their greater likelihood of being a new participant defaulted into the TDF. That doesn’t mean they are more involved/engaged/astute about those investments—but they’re likely more diversified, with portfolios regularly rebalanced (despite the conclusions of that survey above). 

BTW, that’s something that plan fiduciaries might want to keep in mind the next time the concept of reenrollment comes up.

Millennials are thinking about retirement. Probably more than you were at their age.

Millennials have never known a time without a 401(k), nor have they lived during a period when a personal responsibility for saving hasn’t been part and parcel of the education around their benefits package. They’ve been worried about Social Security’s sustainability from the time of their first paycheck (what they probably don’t appreciate is that their parents also worried, and arguably—in the early 1980s—with better reason).

While they certainly have options their parents didn’t, they also have their own set of challenges—some unique, but many unique only in that they are young(er). They have tools and innovative plan design, apps and the aptitude to use them, and in many cases access to professional guidance.

They may not know how much they need to save for retirement (nor do their parents, apparently), they may not yet feel that they can afford to save for retirement, they may not even know how to save for retirement—but you can bet they know they need to.

And, in more cases than one might expect from recent reports, with access to workplace retirement plans, the help of good plan design, and professional retirement planning advice, likely already doing so.         

- Nevin E. Adams, JD 

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[i] And, once again, nobody seems to care about Gen X… who also hates that label!

[ii] The data show that median job tenure in the private sector in the United States has hovered around five years for the past several decades, according to the nonpartisan Employee Benefit Research Institute (EBRI). 

 

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Generations ‘Grasp’

If you’re still struggling to figure out how to reach Millennials (even if you are a Millennial), take heart – there’s (already) another generational cohort entering the workforce.

This new cohort is called Generation Z (at one point, Millennials were referred to as Gen Y, so…) – they are, generally speaking, children of Gen X – born in the mid-1990s, and separated from Millennials by their lack of a memory of 9/11.

Gen Z is, in fact, already entering the workforce – and, according to the U.S. Census Bureau, they currently comprise a quarter of the population. They are seen as being more “realistic” when it comes to life and working than Millennials, who have been characterized as more “optimistic.” Gen Z is said to be more independent and competitive in their work than the collaborative Millennials, more concerned with privacy (Snapchat versus Facebook), and are said to have a preference for communicating face-to-face. It’s said they’ll eschew racking up big college debt, and are said to be interested in multiple roles within a single employer, rather than multiple employers (role-hoppers versus job-hoppers). They have been called a generation of self-starters, self-learners and self-motivators – and they’ve never known a world without the Internet and a smartphone to bring it to their fingertips wherever they are.

Unlike previous generations, whose parents didn’t mention money or focus on financial topics with their kids, more than half (56%) of Gen Z have reportedly discussed saving money with their parents in the past six months. The result, according to researchers, is a young generation that “behaves more like Baby Boomers than Millennials,” is making plans to work during college, to avoid personal debt at all costs, and… to save for retirement. Indeed, 12% of Gen Z is already saving for retirement, according to a recent research report.

Behavior ‘Patterns’

Now, as different as individuals in various generational cohorts can be, I’ve never been inclined to assign those behavioral differences to their membership in any particular cohort. Rather, I think there are things that younger workers are inclined to do (or not do) that workers in every cohort were inclined to do (or avoid) when they were younger. Do Millennials change jobs more frequently than their elders? Sure. But they didn’t invent the phenomenon; for a variety of reasons, younger workers have long been more inclined (or able) to pull up stakes and seek new opportunities (American private sector job tenure has actually been remarkably and consistently “short” running all the way back to WWII). Similarly, younger workers tend to put off saving (certainly for something as far away and obscure in concept as retirement), and when they do start saving, tend to save less than their elders. This was true of the Boomers, of Gen X and Millennials, and – despite their more rapid savings start – will almost certainly be true of Gen Z, left to their own devices.

That last part is a potentially critical difference, of course, in that today plan design differences like automatic enrollment were a relative rarity when the Boomers were coming into the workplace. Some of it is that – at least supposedly – their parents didn’t need to save because they had defined benefit pension plans to secure their retirement. But, even for those who were covered by those plans (and most weren’t) – the DB promise was of little value at a time when 10-year cliff vesting and 8-year workplace tenures were the order of the day. Moreover, Boomers would typically have had to wait a year to start contributing to their DC plan when they entered the workforce.

Headlines tout today’s improved behaviors – more diversified investments, an earlier savings start, a greater awareness of the need to prepare for retirement – as evidence of refined education efforts, or a heightened awareness of the need to save by generations who are more attuned to financial realities. Those are indeed welcome and encouraging signs.

Still, it seems to me that many in these newer generational cohorts are – as are their elders – really the beneficiaries of innovative plan designs – things like target-date funds, as well as automatic enrollment and contribution acceleration, and a heightened focus on outcomes – developed to overcome the behavioral shortcomings of human beings – regardless of their generational cohort.

- Nevin E. Adams, JD