The Great Transfer of Wealth

If you are a millennial reading this, your parents are most likely part of the Baby Boomers generation. Is it a hot take to say that our parents lived through the most lucrative economic period in human history?

Although they were victims of the dot-com bubble and the 2008 financial crisis, our parents were in a position where acquiring assets, specifically real estate, was a realistic goal in their early years. If your parents have been living in the same house for over a decade, they are literally sitting on a winning lottery ticket. In addition to the current salaries they earn, the unrealized gains built up over time can be likened to a second salary.

However, baby boomers are at a point where they have become empty nesters, as their kids have either gone away to school or started living by themselves. If they are not empty nesters yet, they probably have aging millennials who are living in the basement scraping together every last dollar they have to buy their own place. Although there is the need for the occasional large family home to host holiday dinners and get togethers, the detached family home no longer serves its purpose for this generation. We are now entering a period of time where these lottery tickets can finally be cashed out. Whether it is through the process of downsizing or inevitable inheritance, the next two decades will be marked as the Great Transfer of Wealth.

Boomer Money?

Is the idea of money being passed down a foreign concept? Back in 2016, CIBC estimated that $750B would be inherited by members of the Boomer generation over the decade. This money was passed down by the lesser known Silent Generation (individuals born before 1945). The idea of money I addressed in my previous article "The Three I's of Real Estate" stated the following: money cannot disappear or be destroyed, it can only be transferred. The idea of wealth being transferred is a natural part of the economy and, in essence, a part of human nature.?

When broken down, the path of life for every generation is quite similar: the first 18 years are a free trial and provide you the opportunity to accumulate as much knowledge as possible in your childhood. Through this knowledge, you receive an education in an area you are passionate about, and later obtain a job that compensates you for the skills you have learned. During this time, you find a partner to spend the rest of your life with and begin to accumulate assets while simultaneously building a family. After decades of working, you have hopefully accumulated enough assets to support your retirement as well as your children. Upon downsizing or inheritance, this is where the wealth transfer takes place. According to CIBC economist Benjamin Tal, these wealth transfers "impact important economic variables such as wealth distribution, savings, labor market participation, and real estate markets." This idea is not to say that baby boomers have had their wealth handed to them; conversely, it is reaffirming that?transferred wealth is cyclical, as older generations have always provided younger generations with access to more capital.

There is still an important difference that separates the baby boomers from the millennials: the majority of baby boomers could actually acquire assets with the income they were earning. In 1985, the average family income was roughly $53,000 while the average price of a single family residential home in Toronto was $109,000. The ratio between the average house price & average family income was 2.05/1. In 2018, the average family income was roughly $87,000 while price of a home was $787,000, which equates to a ratio of 9.05/1. Millennials, feel free to throw that ratio to your parents whenever they tell about the days of making $3/hr in minimum wages.

The Reverse Inheritance

The wealth transfers that have taken place over generations have mainly been as a result of inheritances and estates being passed down. This is a cynical way of looking at wealth distribution, as it almost insinuates the younger generation is just waiting for the older generation of parents and grandparents to pass wealth on to them. What if there was a proactive way to approach the idea of inheritance? An approach that still follows the same logic of wealth distribution, while setting up the younger generation with a foundation that enables them to become self-sufficient at an earlier age? Enter the concept of Reverse Inheritance.

Reverse Inheritance can be a wealth distribution strategy that provides millennials with a much needed financial boost while providing the benefactors with a sentimental reward in seeing their legacy being passed on. Student loans, rising asset prices, and stagnant salary increases are the largest barriers preventing millennials from being financially independent. According to the 2016 census, 34.7% of young adults aged 20-24 were living with at least one parent in 2016. This number has been increasing since 2001. It is a trend that neither generation can ignore, as parental assistance is becoming a necessity for millennials who have been unable to secure a job that puts them in the top 1%.

As a personal anecdote, my parents utilized this strategy back in 2013 when they invested in pre-construction condos for both my sister and I. The two of us have already been told not to expect an inheritance, as my parents believed in the idea that providing a foundation now would have a more significant impact than a lump sum payment decades from now. It is my parents who inspired the idea of reverse inheritance. Not only have I experienced the benefits in building equity and owning an appreciating asset. it is clear that time in the market is more lucrative than timing the market. By implementing the Reverse Inheritance, this allows the next generation to start making their money work for them sooner, as opposed to waiting for a lump sum of money upon inheritance. The Reverse Inheritance can give birth to diversified investment strategies, innovative business ideas, and asset acquisition, all while cementing the belief that us millennials will look to continue this cycle.

Millennial Entitlement

There are those who may share an opposing viewpoint of the great transfer of wealth. Is the millennial entitled? If we are reliant on money being passed down, will millennials be less motivated to put in the work and create their own success? The same argument can be made that financial stress is actually the main impediment from millennials reaching their full potential. In a survey conducted by the Canadian Payroll Association, 43% of Canadians stated that financial stress had affected their work performance. In fact, this stress has caused an 8.1% loss in productivity based on an eight-hour workday.

Millennials are not entitled. Sure, millennials may be a tech-savvy generation that runs on dopamine from social media, but are we any less entitled than generations before us? Sun Life's Canadian Health Index found that 90% of young Canadians aged 18 to 24 are the most stressed out population in today's economy. Finances were found to be one of the most difficult areas to cope with. In another poll done by Scotiabank, Canadians aged 18 to 34 worry about their finances an average of 2.4 hours per day. If millennials were so entitled, why is this the same generation found to be the most stressed?

Another factor to consider is that humans are creatures of habit. Millennials have seen their parents be the beneficiaries of inheritance from the Silent Generation. Is it wrong for the younger generation to assume that the same distribution will be provided to them? If anything, wealth distribution should actually be a goal for every generation. Although the Great Transfer of Wealth is inevitable during these next two decades, there will be an even greater transfer of wealth after this, and so on.

Final Thoughts

The added money supply in the economy will lead to the greatest transfer of wealth the economy has seen. As was done in previous generations, wealth distribution is a part of the economy's cycle. This article provided an alternative approach to passing down this wealth via a Reverse Inheritance. If done in a strategic manner, this distribution of wealth can provide a financial foundation to a generation that has yet to fulfill their true potential.