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Why Millennials Depend on Parents to Get Rich

by Mohamed EL DEIB 2 years ago in children
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When it comes to money, millennials have a difficult road ahead of them.

Millennials Depend on Parents

When it comes to money, millennials have a difficult road ahead of them.

This is the story we hear: Millennials sunk in student loan debt - expected to exceed £ 1 trillion in the UK over the next 25 years - and struggling to pay rent with globally rising living costs and lower wages. The numbers corroborate this story. Wealth has been declining with each generation, and millennials are financially worse off than previous generations.

But none of this is surprising. We have known for years that the 2008 global financial crisis hit the generation of millennials hard (those who became adults in the early 21st century), with many graduating from a troubled global economy - from which some countries have not even fully recovered. The slow wage increase, high housing costs and the absence of savings for retirement mean that millennials will run after the loss until retirement.

That's if they can stop working. The World Economic Forum estimates that by 2050, when the millennial generation in the eight largest pension markets in the world begins to retire, the pension deficit will be $ 427 trillion. The amount is six times higher than that of 2015, of US $ 67 trillion.

Driving this deficit are items such as longer life expectancy, the deceleration of a long period of growth and low rates of return on savings, together with low levels of financial education.

This scenario does not bring a very hopeful picture for the future, but perhaps there is a scenario that is not so bleak. Would an unexpected heritage from the wealthier generation - the baby boomers - reverse the fate of millennials?

Shelter from the storm

Unlike millennials, baby boomers are the richest generation in history - and will remain so until about 2030.

According to a wealth transfer report from Banco Real de Canada, when this group transfers its assets to younger members of the family, analysts expect them to leave $ 4 trillion in wealth for the next generation. in the UK and North America. The expectation is for an "inheritance boom" from the baby boomers to the family's millenials.

So, the solution to millennials' money problems would be to wait for the wealthier generation of baby boomers to leave the scene to inherit their assets?

That's the argument of Paul Donovan, chief global economist at UBS Wealth Management, who in early 2018 predicted that millennials will become the richest generation in history. In an interview with Business Insider, he argued that wealth does not evaporate from the economy.

And, since baby boomers are a larger generation than millennials, wealth will consolidate as it is passed down through generations. In a simplified way: fewer people, the same amount of wealth distributed among them.

Everyone in the family

But it's not that simple, says Moritz Schularick, professor of economics at the University of Bonn in Germany. He argues that the intergenerational wealth transfer model, in which the millennial generation would become the richest generation by inheritance, makes sense only for the group of the richest 1% in the world.

"It applies to people who have so much that they would not be able to spend all their wealth", explains the researcher. "Normal people - and standard economic models - assume that people save for old age and then use their savings [and] wealth when they no longer have any income. At the end of their lives, there is some inheritance, but not that much. ".

Lowell R. Ricketts, chief analyst at the St. Louis Central Bank's House of Financial Stability Center, agrees. He says that only a minority of baby boomer families will pass on "significant wealth". June 2018 data from the U.S. Federal Reserve confirms this: between 1995 and 2016, only 2% of inheritances were $ 1 million or more.

While some assets, by nature, maintain their value or even appreciate, says Ricketts, we cannot assume that baby boomers will keep their assets until the time of inheritance. "A home may have to be liquidated in retirement to maintain a standard of living. So even if these assets do not disappear from the economy, this does not mean that they will be retained or transferred."

Plan B

Even if the asset transfer actually took place and significantly impacted the millennial's wealth, says Ricketts, time is a crucial factor.

In the Demography of Wealth report by the Fed of the American city of St. Louis, researchers wrote that the accumulation of American wealth for families headed by someone born in the 1980s is 34% below expectations.

"These families are approaching important financial milestones (ownership of real estate, raising children, saving for retirement) with less accumulation of wealth," says Ricketts. "An unexpected inheritance in the future will not help these families to meet their current financial obligations. In other words, the promise of a future transfer will not resolve the payment required for a mortgage."

If you are among the millennials who cross their fingers for a surprise cash in, then Donovan's model probably doesn't apply to you. Waiting for an unexpected inheritance may not be your plan A - and even if this is a reality, you will probably have to wait a long time.

As older generations continue to struggle with retirement savings and live more with less, millennials who want to save for retirement can continue to flirt with a tried and tested option: save money on low volatility investments.

The upside of high interest rates in the economy is not as exciting as finding yourself rich, for sure. But aren't millennials used to accepting what they get? The long-term benefit of higher interest rates in the economy is certainly not as satisfying as making good money suddenly, of course. But millennials are no longer used to enjoying what they have in hand.

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Mohamed EL DEIB

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