By: Mary Lou Miles
As reported in a Financial Post article, over the next 30 years, approximately US$36 trillion will flow from one generation to another, with the pace of bequests already increasing rapidly. In 2016, Americans inherited a record US$427 billion, up 119 per cent since 1989, regardless of inflation.
A study, using Federal Reserve and academic data, revealed that the average age of beneficiaries during this time rose by a decade to 51, with more than a quarter of bequests being adults 61 years or older. It’s clear that the ‘great wealth transfer’ extends further than just the context of Baby Boomers passing down to the next generations.
The picture is similar in Canada. A CIBC Capital market report published in 2016 revealed that within the next decade, the boomer generation stand to inherit C$750 billion from their parents, known as the ‘Silent Generation.. While ‘The Great Wealth Transfer’ is commonly explained in the context of Baby Boomers passing down to the next generations, boomers themselves are also on the receiving end of large sums of wealth.
There are currently around 2.5 million Canadians over the age of 75 with a combined net worth of $900 billion or more. The CIBC recognizes the difficulty of estimating exactly how much of the money will be passed on to the Boomer generation, so focused instead on what Canadians received through inheritance. According to the bank, the average inheritance received by the 50 to 75 age group over the past decade was $180,000, but forecasts suggest that the coming decade will see higher than average transfers, due to the increased value of assets, particularly homes.
Intergenerational wealth transfer can be a daunting concept for many, often leaving beneficiaries feeling overwhelmed and confused as to how best to manage the sudden windfall.
The good news is that inheritances help households afford retirement and prepare for the future.
According to a new analysis by the AP-NORC Center for Public Affairs, adults who receive an inheritance are more than twice as likely as those without to feel prepared for retirement, experiencing more flexibility in the decision about when to retire and express less anxiety about their retirement as a whole.
Knowing you have the right assets is one thing, but knowing what to do next to turn the wealth transfer into a steady retirement is another. Before developing a retirement strategy, take time to consider what ‘retirement’ looks like for you. What kind of post-work life do you want to have? Do you want to maintain your current lifestyle, or are you planning to downsize in this new stage of life? This will determine how much you should be saving and what kind of investment plan is best for you.
Here are five tips to leave you feeling excited about a prospective wealth transfer, rather than anxious or overwhelmed:
- Prioritize debt repayment ‒ Before establishing investment strategies and finalizing retirement plans, try to settle as much debt as possible. This will improve your credit score hugely and help to ensure retirement is worry-free.
- Research, research, research ‒ Whether you are researching where to invest, or researching wealth advisors to help you invest, it’s important not to jump to decisions. Retirement savings are precious, so research thoroughly to ensure your decision making is informed. The best way to evaluate your financial situation is to hire a financial advisor who can objectively manage your wealth. Portfolio managers are licensed advisors that can assist you on fee only basis. Portfolio managers provide discretionary management, and assist with the asset mix decision to insure your investment objectives align.
- Consider the benefits of value aligned investing ‒ It’s during this research period that many prospective investors discover that sound investments are not always gained through traditional investment solutions. Clients can align investments with their personal values, without sacrificing returns, through ESG awareness, divestment, and impact investing. A report released by Genus in September 2019, revealed that divesting away from fossil fuels has a positive effect on returns without contributing to the climate crisis. This is a win-win situation.
- Evaluate whether your retirement fund is dependent on the sale of a property ‒ Wealth transfer is not always in monetary form; assets such as property are also commonly transferred or inherited between generations. If your retirement is real estate dependent, be wary if basing your predictions on current market prices. Property markets change frequently meaning retirement plans could be impacted if retirement coincides with a nationwide slow down in the property market. When valuing real estate growth, the rule of thumb is to utilize the inflation rate to calculate the future value of your property. It’s also interesting to consider that, over the long run, from 1975 to 2013, the stock market outperformed real estate, when comparing the House Price Index from the Federal Housing Finance Agency compared to the investment returns on the S&P 500.
- 3 Diversify your portfolio – Putting all your eggs in one basket can be a risky approach to investment. Diversifying a retirement portfolio widely will lessen the risk and increase your chances of meeting your retirement investment goals. A retirement portfolio needs to serve two goals: control downside risk and achieve a reasonable rate of growth – the hallmarks of what diversification is able to achieve.PW
Mary Lou Miles
is director of wealth management at Genus Capital.