As more members of the Baby Boomer generation begin to engage with estate planners, the discrepancy between expectations of Boomers and their children surrounding passing assets is becoming increasingly evident. The Boomer generation currently holds an astounding amount of wealth. Not just their children, but also estate planners and economists are paying close attention to what they plan to do with it.
According to recent statistics, people over the age of 65 account for about 17 percent of the population, but they collectively hold half of the wealth in the United States.
The Promise of the Great Boomer Wealth Transfer
The general thought is that this generation will die and let its money trickle down to the younger generations, which in turn will provide a stimulus for many families that had previously struggled with finances. Some people even call this the Great Boomer Wealth Transfer. It could help millions of Americans catch up on their finances through a sudden windfall.
Unfortunately, this is likely an overly optimistic perspective. The more likely scenario is that most of this wealth disappears due to long-term care costs and expenses associated with end of life. The money that remains after these costs will largely be savings transfers from the wealthy to the already well off. Counting on an inheritance boom may lead to disappointment.
The New York Times promised great intergenerational wealth transfers in 1999, 2008, 2014, 2019, and, most recently, last year. However, did any of these transfers happen? A professor at New York University teamed with the US Bureau of Labor Statistics to answer this question.
Looking at data from 1989 to 2007, there was never any evidence that such a wealth transfer occurred. In fact, the number of households reporting in inheritance fell by over 2 percent during that time. That said, the research also showed that even a few thousand dollars could make a big difference for people at lower income levels. However, this rarely happens. For the most part, the rich merely got richer through wealth transfer.
The Collective Wealth of the Boomer Generation
An important point to remember is that, even though half of the wealth in the United States is held by the Boomer generation, only a handful of people control that money. After all, this generation includes Michael Bloomberg, Warren Buffett, Bill Gates, and Larry Ellison. As of 2019, the median net worth for people between 65 and 74 was about $267,000, which is not much more than other age groups. Furthermore, the wealth of billionaires is not likely to trickle down to more than a few people.
Perhaps counterintuitively, people who are already wealthy tend to receive the biggest inheritances. In 2019, a research study found that the top percent of Americans in terms of wealth were given an average of $719,000 in inheritance in the prior three years. People who expected to receive a future inheritance estimated an average of $941,000.
Just for the sake of comparison, the poorest half of Americans received an average inheritance of $9,700 with an estimated future gain of $29,000. Families who fell between the 50th and 90th percentiles had an average inheritance of $46,000. While this is a significant amount of money, it will probably not fundamentally change the lives of people receiving it.
The Issues that Deplete Boomer Nest Eggs
One of the biggest challenges that families face in terms of estate planning and passing along inheritance is the high cost of long-term care. Healthcare alone will put a serious dent in any nest egg, but once someone needs long-term care, that nest egg will be drained even more quickly. A full-time home health aide costs over $1,000 a week. The price of an assisted living facility hovers around the same amount. A private room in a nursing home costs more than double that. Unfortunately, Medicare doesn’t cover these expenses until the nest is drained down to a measly $2,000. Overall, Medicaid pays for nearly two-thirds of all people in long term care facilities, which shows just how many people end up paying down their assets.
The cost of this sort of healthcare also continues to rise. The life expectancy of Boomers decreased because of COVID-19, but while this may be a short blip, more likely it puts more families at risk of depleting their financial reserves for healthcare. Furthermore, healthcare is not the only cost that retirees face. Many Boomers feel like they worked hard to earn their life savings and they want to enjoy it. Since 1982, spending among retirees has increased by more than 34 percent. By comparison, spending among young generations increased by less than half that amount in the same period.
Finally, with the passage of the SECURE ACT in 2019, the ability of people who inherit IRAs or 401ks or 4013b monies to spread out their mandatory withdrawals over the rest of their lives (the so-called “stretch IRA”) was taken away, and they must now empty out these accounts within 10 years. Therefore, the tax bite could be higher for many of these people who are inheriting tax deferred retirement accounts as well.