Understanding the Baby Boomer Wealth Transfer Era

Understanding the Baby Boomer Wealth Transfer Era

The U.S. is in the midst of an unprecedented shift, affecting multiple generations at once. Baby boomers, or those born between 1946 and 1964, are passing wealth to the next generation at a staggering rate. According to Cerulli Associates, $68.4 trillion of assets could change hands during the baby boomer wealth transfer era.

Why is this a big deal? Let's explore the origins of this phenomenon and the potential outcomes as things progress.

What's Behind This Money in Motion?

Baby boomers have more wealth than any other generation, thanks to demographics and other factors. For instance, home prices have generally risen in recent decades despite a notable pause around the Great Recession from 2007 to 2009. Many boomers were forming households and buying property during those years, and although not everybody came out ahead, home equity is a significant portion of baby boomers' wealth.

Gains from financial markets are another source of wealth. The Great Recession is just one example of a rough patch investors have lived through; volatility is an ongoing concern, and there is always risk associated with investing. Despite this, boomers have generally been fortunate enough to grow their assets over the long term. Considering big-picture trends, the markets have risen in recent decades.

Workplace changes also play a part in the wealth that baby boomers oversee, as this generation witnessed the decline in pension plans firsthand. Unlike previous generations, boomers took on the bulk of responsibility for investing most of their retirement assets. While their parents and grandparents could often rely on an employer's pension fund, boomers have had to contribute to 401(k) plans and similar vehicles and manage those assets.

Because of those factors, boomers currently hold more wealth in home equity and personal investments than any other generation.

Who Will Feel the Effects of the Baby Boomer Wealth Transfer Era?

The baby boomer wealth transfer affects several generations and a variety of industries.

Baby Boomers

It's wise for baby boomers to arrange how to strategically transfer assets later in life. Members of this generation are more likely than others to have assets left after death, making careful estate planning especially important. Boomers need to choose beneficiaries and make decisions about charitable giving during (and after) life. Failing to do so could cause higher taxes or other unintended outcomes, reducing the impact that baby boomers can make.

Generation X and Millennials

Generation X stands to inherit the majority of assets from baby boomers. Cerulli estimates that this generation will replace boomers as the wealthiest cohort in roughly 25 years. As members of Generation X gain financial security in the coming years, some may feel less pressure to save for retirement. For others, the amounts they receive could be life-changing.

Many millennials will also receive assets during this unprecedented wealth transfer. For them, the impact is likely significant. As the generation with the least assets — and associated with reaching working age during difficult economic conditions — millennials on the whole may see expanded access to homeownership and some relief from student loan debt.

Financial Services

The changing landscape also stands to affect financial services firms, such as investment providers and financial planners. These firms could benefit from solidifying relationships with the next generation. Otherwise, they may see assets go out the door, so there's a real incentive to remain competitive.

Firms may need to adapt in an effort to appeal to Generation X and millennials. For example, it may be necessary to embrace changing technology and offer solutions targeting those who receive assets. It's also wise for firms to build relationships with younger people — who might have found financial firms lacking in previous years — before they inherit assets.

The Bottom Line

Ahead of the transfer of wealth from baby boomers to Generation X and millennials, boomers have an opportunity to leave a meaningful legacy. With planning, they can direct the future of their assets with intention. On the other hand, younger generations may experience a change in their financial status — primarily for the better. As a result, it's wise to consider the larger-scale effects as this wealth changes hands.

Your financial landscape will change as you reach new stages of life. So will the nation's economic landscape as the next generation gathers assets.

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