Ben Franklin famously said, “In this world nothing is certain but death and taxes” As the baby boomer generation faces that reality, The Great Wealth Transfer – the biggest wealth transfer in history – is coming, with an estimated $84 trillion expected to be passed down from Boomers to younger generations over the next 20 years. If these assets are managed wisely, many people will be able to grow their wealth, ensuring their long-term financial health and security.
Consider that:
Boomers will transfer significant wealth to the next generations. As Boomers start passing away in record numbers, they’ll leave $84 trillion in assets to their heirs. Notably, Boomers were the first generation to save money in 401K accounts, after the passage of the Revenue Act of 1978. Prior to that, most employees’ retirement accounts were in the form of pensions administered and guaranteed by their employers. This marked the first time in modern history that employees controlled their own retirement assets, and this personal responsibility for retirement savings created a level of generational wealth that was previously unheard of. Previously, wealth transfers between generations was not a concern for most people, with longer life expectancies and a focus on personal savings for retirement, as 90+% of employees have money in a 401k, wealth transfers are far more common. Boomers must consider how to manage their estates to maximize their assets while minimizing their taxes and expenses for their heirs.
Gen X may not be properly prepared for this newfound wealth. Nearly a third of Americans will receive an inheritance during the Great Wealth Transfer. Since GenXers have an average 401K balance of only $54,500 and just $66,000 in savings – and fewer than 14% have pension plans – many are relying on receiving a sizable inheritance from their parents or grandparents. But they may receive less than they anticipate, as people are living longer, inflation is high, and long-term healthcare costs are soaring, which can eradicate Boomers’ assets. Therefore, beneficiaries must understand how to plan on their own and manage any inheritance they have, regardless of the size.
People must consider estate taxes. While estate taxes may not change as dramatically as expected under the new administration, people must still be aware of factors that could impact their estate taxes. For instance, increasing real estate values and decades of a soaring market may mean that more people will need to plan for estate taxes. Planning lifetime gifting and charitable giving strategies can help mitigate these taxes, allowing Boomers to do good things with their money while they’re still alive. For instance, “giving while living” – e.g., paying for grandkids’ education – can help reduce the value of an estate, save taxes, and help future generations succeed. However, many within the older generations haven’t started planning, have outdated wills, and didn’t establish trusts to help with the proper distribution of assets.
To maximize wealth, minimize taxes, and build generational wealth:
- Invest over the long-term. As Warren Buffet says, “Time is your friend and impulse is your enemy. Take advantage of compound interest and dont be captivated by the siren song of short term markets” Stay focused on your long term goals and not the day to day noise.
- Create, review, and update your estate plan. Ensure that your assets are distributed per your wishes by creating an estate plan. This includes compiling a list of your assets, and naming beneficiaries for each. Review and update your estate plan regularly, especially after any significant life change, such as the death of a spouse or the birth of a child.
- Support financial literacy across generations. You – and your heirs – should have a solid understanding of how to save, invest, and build wealth. Encourage the next generation to master the nuances of personal finance, which will help them take charge of their financial health and maximize their financial successes.
- Diversify your portfolio. The old adage “don’t put all your eggs in one basket” applies here. Don’t put all your wealth in one stock, one business, etc. Establish various income streams, such as stock dividends, investing in a high- yield CD, rental income, etc. to help build wealth, despite market fluctuations.
- Work with a qualified fiduciary financial advisor. A professional can help develop customized financial, tax and estate plans that align with each person’s circumstances and long-term financial goals.
All generations should plan and implement proper wealth management strategies, whether they’re passing down or inheriting wealth. This is instrumental in building assets – and wealth – over time.
Paul S. Stanley, CFP®, CPM®, CFF®, Managing Partner at Portsmouth, NH-based Granite Bay Wealth Management, was recently named Best-in-State Wealth Advisor by Forbes. His team of smart, experienced financial professionals work hard to help clients maximize successes with their investments and financial plans. For more information, visit https://granitebaywm.com.
