By most standards, we Baby Boomers look pretty affluent. According to the Federal Reserve, those of us born between 1946 and 1964 have a median retirement savings of $202,000 (although it’s very disturbing that the same report says that 43% of us don’t have any retirement savings).
And a good portion of Boomers stand to get richer, as Merrill Lynch expects us to inherit even more. But that’s not true for the generations that will follow us into retirement. According to the study, successive generations will experience diminishing returns in inheritance:
· Gen X (1965-1980) will inherit $30 trillion.
· Millennials (1981-1996) will inherit $27 trillion.
· Gen Z (1997-2012) or younger will inherit $11 trillion.
Just 22% of Boomers expect to leave their children an inheritance, as reported by the 2024 Planning & Progress study from Northwestern Mutual, but the amount passed on is forecast at a whopping $90 trillion!
However, 38% of Gen Zers and 32% of Millennials expect an inheritance from their parents. And 54% of Gen Zers and 59% of Millennials reported that an inheritance is “crucial to achieving financial security and retiring in comfort.”
Wow—seems like a definite communication gap, and it should be a wake-up call for younger generations! Other studies have confirmed this mindset of the Baby Boomers. Only 11% of Boomers said leaving something for the kids is their top financial goal. Another 35% said it’s “very important.”
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Let’s look at the reasons why.
5 Reasons Behind the Inheritance Expectations Mismatch
- The “Me” generation is afraid of not having enough money to retire (see above), as they haven’t saved enough and are afraid their assets and their Social Security benefits will not produce enough income to enjoy the lifestyle that they want or have gotten used to. We are living longer—women are expected to live 79.3 years and men, 73. And there are more than 100,000 people in the U.S. who are older than 100. So, the fear that our money won’t outlast us is very real.
- Baby Boomer retirees think they’ve “done enough” for their children—paying for education, weddings, taking in their grown children due to a number of circumstances, providing college funds for grandchildren, and much more—especially when most of us didn’t have the same kind of financial assistance from our parents. I hear this a lot from my friends—as well as my real estate clients.
- Boomers want to spend the money they earned on experiences—like travel and hobbies—while they are mentally and physically able to enjoy them. Most parents of Boomers didn’t have the lifestyles, the luxuries, or the opportunities that we Boomers have enjoyed. For example, almost all of my friends have taken vacations out of the country, but I can’t remember any of our parents doing that!
- Fear that their largesse will enable bad financial habits. I hear this a lot, too. I have one acquaintance whose 40+ year-old son has never had a real job, despite spending six years attaining a four-year degree. He’s always been told he’s going to inherit, and it’s negatively affected his ambition and drive. Unfortunately, this is not a rare occurrence.
Even musician Sting—who has an estimated net worth of $550 million—said, “[he] has instilled a solid work ethic in his children and he plans to spend most of his money.” - Sibling rivalry. Many parents are aware that inheritances—especially those that seem unfair—can create lifelong estrangements among their children. So, they elect to transfer their wealth in other ways, such as to charities that are meaningful to them. Both Bill Gates and Warren Buffett have said that they plan to leave most of their money to charities.
Better Wake Up—‘Cause You Need a Plan!
My apologies for mangling that line, to John Farrar, who wrote the song, You’re the One That I Want, for the musical Grease!
But it is true!
Generations following the Boomers may resent us as they think we’ve had it easy—able to buy a home and a great lifestyle at a reasonable price—while inflation is preventing their independent lifestyles.
A study by Wharton confirmed this recently. It reported, “After the economic boom following the end of World War II, the number of young adults living with their parents dropped to a low of 27% in 1960.” That has been rising for each generation, and today, nearly 50% of those aged 18-29 are living with their parents.
However, with inheritance statistics being what they are, that resentment will need to be tempered by a real investment plan.
And the sooner you get started (as the following graph shows), the faster you will begin to secure your lifelong financial plan!
Source: money.usnews.com
3 Easy Steps to Get Started
Building your investing life starts with three easy steps.
1. If you haven’t been taking advantage of your employer’s 401(k) plan, now is the time to do so!
For 2024, you can contribute up to $23,000 to your 401(k) plan. If you’re not making the maximum allowable contribution to that account, I recommend that you begin stepping up your contributions with every raise you get. After all, you will be leaving free money (your employer’s contributions) on the table if you don’t contribute the maximum!
2. Once you are contributing the maximum to your 401(k), the next step is to begin saving via an individual retirement account (IRA). You can contribute up to $7,000 in 2024.
3. And lastly, once you have maximized your 401(k) and IRA contributions, you can begin building your individual investment accounts. The easiest way to do that is to start with a few broad-based index exchange-traded funds (ETFs). Once you get accustomed to seeing your financial future expand, you can branch out into individual stocks.
But in the beginning, index ETFs are a great place to begin. These funds are built to track the performance of a specific market index, such as the S&P 500 Index, Nasdaq Composite Index, or Dow Jones Industrial Average, so they cover a lot of individual stocks and investment sectors. And while index ETFs are similar to index mutual funds, I prefer them as they can be traded throughout the day like a stock, rather than just at the end of the trading day (like a fund).
There are scores of index funds, but I’ve found three that will help you get started, all of which are rated “Strong Buy.”:
iShares Core S&P 500 ETF (IVV)
This fund tracks the S&P 500, an index of 500 of the largest companies listed on stock exchanges in the United States. It has an expense ratio of 0.03%, with a 5-year return of 14.97%.
Shelton NASDAQ-100 Index Direct (NASDX)
If you are interested in technology, this fund tracks the performance of the largest non-financial companies in the Nasdaq-100 Index, which includes primarily tech companies. The expense ratio is 0.52%, and its 5-year return is 20.12%.
Vanguard Total Stock Market ETF (VTI)
This fund effectively covers the entire universe of publicly traded stocks (currently 3,621 companies) in the U.S. The expense ratio of the fund is 0.03%, and its 5-year return is 14.25%.
You can buy any of these funds directly from its fund company or through most online brokers.
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