With matters of money, millennials have an uphill climb.
That is the story we hear: millennials digging out from record student loan debt – expected to soar above £1tn ($1.27tn) in the UK over the next 25 years alone – and scrambling to pay rent with globally rising living costs and lower wages. And the numbers corroborate the story. Generation-on-generation wealth is declining, and millennials are financially worse off than those before them.
None of this is exactly surprising, however. We have known for years that the 2008 global financial crisis hit millennials hard, with many graduating directly into a troubled global economy – from which some countries are still struggling to rebound entirely. Slow wage growth, high living costs and a lack of retirement savings mean millennials will be playing catch-up well into retirement.
When baby boomers pass on their assets to younger family members, analysts expect them to leave $4tn of wealth to millennials within the UK and North America alone
That’s if they can afford to quit working at all. The World Economic Forum predicts that by 2050, when millennials in the world’s eight largest pension markets start to retire, the retirement savings gap will be $427tn. That’s more than six times the 2015 figure of $67tn. Driving this shortfall are things like longer life expectancy, the deceleration of a long-term growth environment and poor savings rates, coupled with low levels of financial literacy.
This doesn’t paint a hopeful picture for the future – but maybe there is a scenario that is not so bleak. Could a windfall from the richest generation – baby boomers – reverse the fortunes for millennials?
Shelter from the storm
Unlike millennials, baby boomers are the wealthiest generation in history – and will remain that way until roughly 2030.
According to a wealth transfer report by the Royal Bank of Canada, when this group passes on their assets to younger family members, analysts expect them to leave $4tn of wealth to millennials within the UK and North America alone. This ‘inheritance boom’ will position millennials who have baby boomers in their families to receive record sums of inheritance.
Is the solution to millennials’ money woes, then, to wait for the wealthier baby boomer generation to die out and inherit their assets?
It’s an argument made by Paul Donovan, UBS Wealth Management’s chief global economist, who earlier this year predicted that millennials will actually become history’s wealthiest generation. Speaking to Business Insider, he argued that wealth doesn’t evaporate from the economy. And, since baby boomers are a larger generation than millennials, wealth will consolidate as it is passed down through the generations. Simply: fewer people, the same amount of wealth distributed among them.
All in the family
It’s not that simple, says Moritz Schularick, professor of economics at the University of Bonn in Germany. He says that the intergenerational wealth transfer model in which millennials become the wealthiest generation on record is a “global top 1% model”.
“It applies to people who have so much they can never spend their wealth,” he says. “Normal people – and standard economic models – assume that people save for old age and then use their savings [and] wealth to pay for things when they have no income. At the end of their lives there is some inheritance, but not that much.”
Between 1995 and 2016, only 2% of bequests equaled $1,000,000 or more – yet this money comprised upwards of 40% of wealth transferred
Lowell R. Ricketts, lead analyst for the Federal Reserve Bank of St. Louis’s Center for Household Financial Stability, agrees. He says that only a minority of baby boomer families will pass on “significant wealth”. (June 2018 figures from the US Federal Reserve confirm this: between 1995 and 2016, only 2% of bequests equaled $1,000,000 or more – yet this money comprised upwards of 40% of wealth transferred.)
Although some assets by nature do retain value or even appreciate, Ricketts says, we cannot assume that baby boomers will hold onto assets until bequest. “A home and the property it’s built on may need to be liquidated in retirement to maintain a standard of living. Therefore, even if those assets don’t disappear from the economy, they might not be retained and passed on.”
Tried-and-true plan B
Even if the transfer of assets occurred and it also significantly impacted millennial wealth, says Ricketts, timing is a crucial factor.
In the St. Louis Fed’s Demographics of Wealth summary, researchers write that American wealth accumulation for households headed by someone born in the 1980s are 34% percent below expectations. “These families are approaching important financial milestones (homeownership, raising children, saving for retirement) with diminished wealth accumulation,” says Ricketts. “A windfall in the future won’t help these families meet their current financial obligations. In other words, the promise of a transfer in the future won’t help meet the down payment required for a mortgage.”
If you are among the millennials crossing your fingers for surprise cash infusion, then Donovan’s model likely doesn’t apply to you. Waiting on a windfall can’t be your plan A – and, even then, you might be waiting too long.
As elder generations continue to struggle with retirement savings and live longer on less, millennials looking to save for retirement might want to keep courting the tried-and-true option: socking away money with lower-volatility, higher-return investment vehicles. The silver lining of higher interest rates in the economy is not nearly as thrilling as found wealth, sure. But aren’t millennials used to taking what they can get?
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