Private Banker International

June 30, 2005

 

Preparing for the coming US wealth payout tidal waves

By Charles Davis

US wealth firms are preparing for what they predict will be massive payout waves as the baby boom generation retires en masse. The repercussions for high net worth households are only just beginning to be understood

The wealth industry agrees these payout waves will be staggering in size. Today, about 47 million retired Americans hold roughly $10.7 trillion in retirement account assets, according to the US Census Bureau.

However, that number pales in comparison to what is coming: 76 million baby boomers will retire over the next 30 years. Retirees' blithe attitudes will soon strike against hard demographic facts. By 2010, the number of Americans older than 65 is expected to have increased by nearly 30 percent from 2000 levels and the numbers will grow every year in the 2010s.

In other words, this will be the largest generation of retirees in US history. The elderly will live far longer, and be far costlier, than their predecessors. This has the potential to overwhelm the Social Security and Medicare systems and could cause repercussions throughout the financial markets.

Baby boomers

Retirees could eventually control as much as $136 trillion, according to predictions. In turn, it is estimated that $40 trillion or so of that total will be passed down to their heirs.

Advisers and market analysts agree that as the baby boom generation begins to retire in droves, many retirees remain dangerously uninformed about how much annual income they will need and about how to manage their investments.

For financial advisers, this represents an important business opportunity, but only if advisers become less transactional and more trusted agents. Advisers will increasingly need to serve as educators for people who have up until now considered retirement to simply be a dot on the horizon, say experts.

Americans are living longer, to an all-time high of 77.2 years on average in 2001, and they are increasingly cracking their nest eggs to fund their own extended retirements.

Despite heated debate about the exact size of the bequest, there is universal agreement on one stark point: the vast majority of baby boomers will never inherit a single dime. Less than 20 percent of them have received a bequest, according to the Survey of Consumer Finances (SCF), a poll of about 4,300 families conducted every three years by the Federal Reserve Board in Washington, DC. Of the bequests made, the average value was less than $50,000.

Adviser armies

Yet the staggering wealth of baby boomers' parents means that, at the very least, $1 trillion will shift to their children in the next decade. It is no surprise that a small army of lawyers, accountants and financial planners hope to profit from whatever wealth transfer does occur.

Todd Thomson, chairman and chief executive of Citigroup Global Wealth Management, speaking at a UBS asset management conference, said he saw two big "wealth payout opportunities". First, the coming inheritance wave will be massive, as children enjoy the fruits of post-World War II boomer parents who are dying. Secondly, inheritances worth around $250,000 would make up a big segment of bequests, and his Smith Barney arm will be gearing up to advise on this.

Thomson said that although Citi has disposed of its Travelers insurance arm, it does not make much difference because most money could be made from distributing and advising - rather than 'manufacturing' annuity products.

"Two-thirds of the income from annuities is made from advising and distribution and only one-third from manufacturing them," he said. "We will let the life insurers pick up that one-third and make a return on equity on this business of 70 to 80 percent."

Meanwhile, consider this measure of the coming wealth wave: Ken Dychtwald, president of Age Wave, a business development firm in California, reports that people aged over 55 currently control nearly two-thirds of all the nation's financial assets. They own some 40 percent of all mutual funds, 60 percent of all annuities and 48 percent of all luxury cars.

A closer look at the SCF data reveals that an old adage still applies: the rich keep getting richer. Just 1.6 percent of heirs in 1998 received more than $100,000 - and they tended to be the wealthiest Americans. Some 45 percent of people who inherited money were already worth between $1 million and $10 million. By contrast, only 6 percent of Americans who had no net worth on paper received a bequest.

This transfer of assets will ripple through the economy as lawyers, accountants, estate planners, wealth managers, real estate brokers and banks expand their services to manage the inheritances of baby boomers. Already, such financial institutions as Wells Fargo, Bank One and Prudential have expanded their trust departments. Bank of America bulked up on financial advisers by 20 percent in 2004 during a dismal market period.

However, marketing wealth transfer services to the people who will leave estates, and to the people who will inherit them, is no small feat. When Prudential commissioned research into estate planning several years ago, it discovered that different segments of seniors have very different views about inheritance.

What is clear is that baby boomers are living very differently from the way their parents did - and this affects the choices they make upon receiving an inheritance. The payout wave predicted by Thomson may not be as massive as first expected, but it still numbers in the trillions of dollars - and it will still define much of private banking and investment management for the foreseeable future.