20 December 2022

Australia is about to experience its largest intergenerational wealth transfer – $3.5 trillion in the next two decades. By 2050, Baby Boomers are expected to leave $224 billion in inheritances to Millennials and Gen Z – a fact the younger generation are all too aware of with 43% of Gen Z and 35% of Millennials expecting an inheritance.

While our Managing Wealth Report shows that Gen Z and Millennials in Australia are confident about their ability to manage money, research suggests they lack adequate financial management skills. Most Millennials and Gen Z are spenders rather than savers and take greater risks when it comes to investing. Further, most only have an average of $79,999 in superannuation balance against the $1 million they believe they need to retire.

Millennials and Gen Z need financial education to help them preserve the intergenerational wealth they are set to receive.

What is the intergenerational wealth transfer?

Intergenerational wealth transfer is the inheritance of wealth from older to younger generations. We are currently facing 'The Great Wealth Transfer', where huge sums of wealth are gradually moving from the Baby Boomer generation to future generations.

How prepared is the next generation for the intergenerational wealth transfer?

According to our research on intergenerational wealth transfer in Australia, 35% of Gen Z and 43% of Millennials can confidently say they know how to manage their finances; 51% of Gen Z and 72% of Millennials keep a budget while over 90% of the younger generation say that they pay their bills on time.

However, according to a study by the TIAA institute, only 11% of Millennials have a high level of financial literacy. Research from Findex also shows that the saving and investing habits of these younger generations do not reflect preparedness.

Spending and saving habits of Millennials and Gen Z

• Spending for now: 64% of Gen Z and 63% of Millennials spend for now and are not too invested in their future.

• Bigger appetite for risk: The younger generation is more open to taking financial risks with 77% of Gen Z and 70% of Millennials ready to put their money into high-risk investments such as crypto currency.

• Reliance on friends and family for financial advice: The younger generation rely less on financial advisers with only 15% of Millennials, compared to 36% of Baby Boomers, making investment decisions with the advice of a financial adviser according to our Managing Wealth Report.

• Focus on building wealth: Only 17% of Millennials are concerned about retirement. 23% focus on building wealth.

When it comes to investments, superannuation is the top investment among Millennials, Gen Z, and Baby Boomers. Younger generations also prefer a well-diversified portfolio.

Spending and saving habits of Baby Boomers

• Prefer more traditional investments: Baby Boomers favour traditional banking products like term deposits, high-interest savings accounts and cash for wealth management.

• Reliance on own research and financial advisers: only 11% of Baby Boomers rely more heavily on their own research (53%) and professional financial advice (36%).

• Focus on retirement: 25% of Baby Boomers are concerned about building wealth. The majority, 34% of Baby Boomers want to prepare for retirement.

What's at risk if the next generation doesn’t know how to manage intergenerational wealth?

The Australian economy has shifted since the pandemic. Economic uncertainty, rising inflation, high cost of living, and geo-political tensions is now the norm. Between June 2021 and June 2022, the Consumer Price Index (CPI) increased by 6.1%, the fastest annual increase since 2001 and Australian citizens are feeling the pinch.

Wealth transfers can help offset intergenerational wealth inequality. But the transfer of wealth to younger generations who have no clear financial plan could be disastrous. Research shows that intergenerational wealth is often lost when it reaches the third generation. The under-preparedness of the younger generation to manage intergenerational wealth means that the future of the $3.5 trillion in the next 20 years is at risk.

How to prepare for the intergenerational wealth transfer

Ensuring that future generations continue building intergenerational wealth requires you to pass on your financial wisdom and introduce your children to trusted financial advisers. Here are some ways to prepare for intergenerational wealth transfer:

• Start the conversation around finances early

• Talk openly and often

• Share your financial knowledge

• Introduce them to reputable financial sources

• Involve them in your retirement planning

• Introduce them to your financial adviser or find a financial adviser you can talk to together

More information on how to prepare the next generation for the great wealth transfer can be found here.

How financial advice can help with intergenerational wealth transfer

Financial advice can help you with the tools you need to impart financial literacy on the next generation.

A financial adviser can help to:

• Enable open and productive dialogue. Money talks can be uncomfortable and sensitive. A trusted financial adviser comes in as a mediator to provide unbiased advice.

• Illustrate the power of starting early. Starting early helps you grow your money through the power of compounding. A financial adviser can illustrate how the concept of compounding works to motivate the next generation to begin investing early.

• Cashflow modelling and forecasting. Cashflow modelling involves forecasting your future cash position using expected inflow and outflow assumptions.

• Put strategies in place to meet the goals of both generations. Younger generations do not care much about retirement planning and are less risk averse than Baby Boomers. A financial adviser can help create strategies to reconcile the goals of both generations.

• Provide peace of mind your kids will be okay. Working with a financial adviser gives you the assurance you need that your kids will make sound financial decisions.

• Make accessing financial advice more affordable for your kids. Most younger generations fail to seek financial advice because they believe it will be too expensive. Involving a financial adviser as you prepare for intergenerational wealth transfer can offer your next generation affordable financial advice.

Professional financial advice equals successful intergenerational wealth transfer

The most effective way to preserve intergenerational wealth is to empower Millennials and Gen Z via the transfer of financial literacy.

A financial adviser can act as an conduit, that facilitates these conversations between parents and beneficiaries. They can also provide financial literacy to prepare your beneficiaries to better manage their inheritance. A better relationship between financial advisers and beneficiaries now equals a better chance for the next generation to continue building intergenerational wealth and avoid intergenerational wealth disparity.

Key takeaway

Findex provides tailored financial advisory services to help you achieve your financial goals. For over 30 years, we have been giving our clients personalised intergenerational wealth management services. Our services include financial modelling, superannuation advice, tax and asset protection structures, and investment advice. To get in touch, submit this form for a professional consultation so you can enjoy successful intergenerational wealth transfer.

Sources:

1. Australian Government Productivity Commission, Wealth transfers and their economic effects, 2021

2. Findex, Managing Wealth Report, 2022

3. TIAA Institute, Understanding the state of millennial personal finances, 2018

4. Australian Bureau of Statistic, Consumer Price Index, 2021-2022

5. NAB, The Great Australian Wealth Transfer, 2022