Why Baby Boomers should pass on their wealth now and create a living legacy
This wealth manager loosened the reins on his own assets after realising it was better to look at passing on wealth to the children in ‘the living years’. This is what he tells his clients.
Multi-generational issues are in the news everywhere. In the area of wealth, we hear it said that Baby Boomers have an advantage that today’s younger generations don’t. The over-60s cohort is asset and cash-rich, having had the benefits of time and more positive economic cycles.
Younger Australians are living with a sluggish economy and record levels of national debt. That latter burden will also fall on them as the government ramps up taxation.
Yes, Boomers will also be paying more given the changes to superannuation and potential capital gains tax changes. But those taxes will be with the young too in years to come.
Why the imbalance? Baby Boomers had significantly better housing affordability compared to today’s generations. They purchased homes at a median of four to five times their annual income. In comparison, today’s generations are facing ratios of nine to 14 times their income.
In defence of Boomers (I’m one), there was a time in the 1980s when we faced very high interest rates – as high as 18 per cent! But the lower initial loan amounts meant servicing a mortgage was easier relative to income.
Again, it’s a stark comparison to the large mortgages required for today’s borrowers. Put simply, they’re carrying larger debt. Today’s buyers also face property prices that have outpaced wages growth far more dramatically.
This disparity in affordability has led to a mechanism of intergenerational inequality.
What’s more, as a wealth manager I’d note that real estate was a wealth creation vehicle for many of our older clients – and a mechanism to transfer wealth across to future generations.
This has also changed. It’s especially so for our Victorian clients, who are subject to the imposition of extremely high and unfair land taxes, including the recently introduced vacant land tax.
Some clients are divesting from real property assets and investing across multi-asset portfolios. That’s because the cost of holding real assets negates – or is even higher than – the revenue generated from these assets. As one client said: “It just isn’t worth it”.
As the cost of housing has gone up, so has the cost of private education. Again, in Victoria, the state government removed the exemption for payroll tax, which for many non-government schools has been passed straight on to the fees payable. It’s another imposition, as the fees payable for private education have well exceeded wages growth.
While many readers may not weep at these issues in the belief that the outcome will be a more meritocratic and efficient economy, they are important to understand and for older generations to consider so they can assist younger generations in passing wealth down. A book I recommend to our clients to help understand the landscape is Bill Perkins’ Die With Zero: Getting All You Can From Your Money And Your Life.
It is not about literally dying with a bank account of zero (the author is a person of significant wealth himself), but it does highlight a theme I discuss with clients: handing down wealth in the living years.
The messages of the book helped me “loosen the reins”, so to speak, on our own assets. I saw that it was better to look at passing on wealth to our children in “the living years” against them inheriting a few decades from now.
That’s especially so considering the housing issues mentioned earlier. It’s about making a judgment on what asset base we need to live our preferred life. It means helping those in their 30s and 40s who need our assistance today, not when we die and they are in their 60s.
On the same theme, if helping your children or younger relatives is a priority in your life, there is nothing more important than education for grandchildren – again if you can afford it.
The big takeaway for me from Perkins’ book was to think about experiences and creating happy memories with your family. The reality is we are all going to die one day, but creating experiences and therefore creating a positive for and with our family is a gift in itself.
An older client came to me to talk about leaving money for her grandchildren through her estate when she dies. I suggested that, as she could afford it, she could give that money now and enjoy the gratitude of her grandchildren receiving the bequest in the present. She would not have any enjoyment when she was dead!
She took the decision to make the gift early. Some of the grandchildren cried they were so grateful – and she experienced the appreciation first-hand. As the old saying goes: “You can’t take it with you.”
In looking at wealth and investment around the generational disparity issues that exist today, I understand that passing on wealth in the present day isn’t for everyone. Nor will everyone agree with the approach.
There is no clear way to apply what I have suggested. No one knows how long they will live; how much will be needed to live comfortably in older age. Only you can decide what’s right for you.
But I do recommend thinking about the ideas presented in Die With Zero – making bequests earlier and creating what is effectively a “living legacy”.
Will Hamilton is the managing partner of Hamilton Wealth Partners. will.hamilton@hamiltonwealth.com.au
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