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A version of this article first appeared in CNBC’s Inside Wealth newsletter by Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions directly to your inbox.
New estimates of huge wealth transfers have sparked debate over how many trillions of dollars will be passed down from baby boomers to their successors, and how it will be spent and invested.
Last week, Visa Business and Economic Insights released new predictions about massive wealth transfers, estimating that $36 trillion of baby boomers’ wealth will be passed on to Generation X and Millennials over the next 20 years. This figure is part of a widely cited estimate by Cerulli Associates that by 2048, $105 trillion will be passed from older generations to their heirs.
The more than $60 trillion gap between the two studies raises new questions about the scale and impact of massive wealth transfers. Some say this is the largest in history and will dramatically reshape wealth management, philanthropy and the global wealth landscape. Others argue that the effect is much more limited and simply represents a continuation of long-term inheritance trends.
Visa and Cerulli’s evenly matched numbers highlight how important these estimates are for asset managers and other companies overhauling their businesses to prepare for the next generation of wealth.
Credit card payment company Visa’s research focuses on the amount of inherited wealth that everyday American consumers will spend. Cerulli, a financial research firm, focuses its research on the total amount of wealth transferred, including the huge proportion of wealth inherited by the ultra-rich. While Cerulli focused on all wealth transfers over the next few decades, Visa focused only on transfers from the baby boomer generation.
“We wanted to really look at how much money was actually being spent,” said Wayne Best, Visa’s chief economist. “A lot of people think about $93 trillion or $124 trillion and think, ‘All that money could be spent on spending, which is incredible.’ That’s why we went through a step-by-step process.”
The visa process began by estimating the total wealth held by today’s baby boomers to be approximately $93 trillion. The report also removed $5 trillion in debt, including mortgage debt, and subtracted the wealth of the top 1% (estimated at $28 trillion).
Best said the top 1%, or people with a net worth of at least $12 million, approach money very differently than the rest of consumers. They tend to use a smaller percentage of their wealth to buy different things.
“They don’t spend money like other people,” Best said. “They’re buying yachts and planes. All that’s great for the economy, but that’s not what the average person is really thinking about. So we decided to take out the top 1 percent and put this on a more normal, level playing field.”
Visa has since removed retirement spending for baby boomers, but the amount may be larger than expected. Boomers are living longer and spending more of their wealth than past generations, with Visa estimating their retirement spending at $16 trillion. It also deducted $8 trillion in philanthropy and taxes.
Additionally, Visa focused its analysis solely on the wealth transferred from baby boomers over the next 20 years. Cerulli investigated transfers from all generations up to 2048. This includes older members of the Silent Generation as well as younger members of Generation X, who are currently between the ages of 46 and 61.
After deducting debt, wealth for the top 1%, retirement spending, taxes, and philanthropy, Visa estimates that baby boomers will inherit only $36 trillion of the $93 trillion in wealth.
Of that $36 trillion, they estimate that $28 trillion will go to savings and investment and $8 trillion to spending. The $8 trillion will be spent primarily on cars, housing, travel and retail.
“You know, $8 trillion in spending is nothing to sneeze at. It’s a significant amount of money and it’s incremental. But we wanted to put it in perspective, because when you start spending trillions of dollars, it can get confusing very quickly,” Best said.
In contrast, Cerulli sought to estimate the total amount of wealth that all wealthy people of all ages will inherit by 2048.
Chase Horton, associate director of wealth management at Cerulli, said the biggest impact of the mass transfer of wealth will be on wealth management, not consumer companies.
He said half of the more than $100 trillion that will be inherited will come from wealthy and ultra-wealthy families. In the coming years, the first recipients will be spouses, primarily women. Cerulli estimates that $4 trillion goes to spouses before being passed on to children or other family members.
“If you look at this demographic, on average your spouse is a few years younger, and they live a few years longer,” Horton says.
Cerulli said retirement expenses, taxes and debt are taken into account. It also estimates that of the $124 trillion in total transferable assets, about $18 trillion will be donated to charity, and a total of $106 trillion will be passed on to heirs and spouses.
The first recipients will be Gen X, then Millennials, and then Gen Z. Gen
Horton said it would be a mistake to downplay the impact of large wealth transfers and the acceleration of inherited wealth for the wealth management industry and companies serving wealthy clients. Currently, one in four wealth management clients comes from inherited wealth, he said, second only to business owners and founders and more than business owners.
“The focus of the report in conducting this analysis is to understand where the wealth is today and where that wealth will move tomorrow so that the wealth and asset management industry can adapt,” Horton said. “What we continue to emphasize as a key consideration for the wealth management industry is ensuring that relationships are built not only across generations, but also across spousal lines.”
