'A million bucks isn't what it used to be': What if 'great wealth transfer' isn't so great?

 The expected inheritance of trillions of dollars could get eaten up by healthcare, taxes and longevity

There's been much ado about the so-called great wealth transfer's promise to shift trillions of dollars to younger generations over the next 20 years, but what if this hoped-for windfall fails to happen?

This wave of wealth has been predicted for years, and has been heralded as a way for younger generations grappling with student debt, high housing costs and stagnant pay to shore up their financial security. The thinking was that as older, wealthier baby boomers die, they will bequeath their riches to their children, other family members and charities. Recent research from consulting firm Cerulli Associates estimated that $72.6 trillion would go to younger heirs, with an additional $11.9 trillion earmarked for charities.

But new research from Northwestern Mutual said only 22% of baby boomers and older generations and Generation X plan to leave behind a financial gift when they die.

That could disappoint the younger generations: one-third of millennials and 38% of Generation Z expect to receive an inheritance, according to Northwestern Mutual's 2024 Planning & Progress Study.

"There are a lot of issues that can derail the great wealth transfer. The great wealth transfer can look robust, but when you look at it on a granular level, it may not be what it's been reported to be," William Milne, founder, partner, and private wealth adviser at Northwestern Mutual's C3 Wealth Management, told MarketWatch.

"There's a perception of wealth that may not be real. Younger people see their parents with a million dollars in a 401(k), but it's like that saying 'a million bucks isn't what it used to be.' There's a lack of clarity and communication," Milne said. "They don't understand that money needs to carry on mom or dad to [age] 95 or 100."

The risks to the great wealth transfer include healthcare expenses in retirement and rising taxes, as well as people living longer, Milne said.

For example, Fidelity Investments estimates that a 65-year-old retiring this year can expect to spend an average of $165,000 on healthcare and medical expenses during their retirement - up nearly 5% from a year ago and more than double the forecast in 2002, when the company began estimating this cost.

"From the younger generation's standpoint, we believe it comes down to a communications breakdown and an expectations breakdown," Milne said.

Half of Americans expecting an inheritance consider it "critical" or "highly critical" to their financial security, Northwestern Mutual said. Gen Z has the greatest expectations for the impact of an inheritance on their retirement strategy, expecting that the gift would cover 10% of their retirement funds, the research found.

Northwestern Mutual found that parents may fear their heirs won't be good stewards of an inheritance.

Six in 10 American parents said their children do not value financial responsibility at the same levels that they do. And among them, more than half (52%) are concerned that their differences in values could negatively impact the family's assets from one generation to the next, the research found.

"Education is the core issue here. Some level of financial aptitude should be part of high school or college curriculum," Milne said. Families also need to educate their heirs and communicate about their expectations.

There's also a lack of preparation when it comes to estate planning, Northwestern Mutual found.

The research found 40% of baby boomers and older generations, and two-thirds of Gen X (65%) do not have a will. Among the primary reasons: people think they don't have enough assets, they're too young, it's complicated and awkward to think about, and they're uncertain about where to leave their assets.

Without a will, you would die "intestate" and your estate could languish in probate court as the intricacies of your finances get sorted out and a variety of state laws dictate who gets your assets.

Almost half (47%) of baby boomers and older generations who expect to leave an inheritance or gift have not talked to family about their financial plans. More than a third of Gen X (38%) said the same, Northwestern Mutual found.

To make sure younger generations aren't prematurely counting on an inheritance, Milne said the firm plans very cautiously.

"We will not put an inheritance into a financial plan unless we know what's been done a generation ahead," Milne said so that the younger set doesn't bank on funds that may never materialize.

"If something good happens, then it's a bonus," Milne said.

https://www.morningstar.com/news/marketwatch/20240809256/a-million-bucks-isnt-what-it-used-to-be-what-if-the-great-wealth-transfer-weve-been-waiting-for-isnt-so-great