3 May 2022

Generational Wealth Planning

An often-cited quote by Aristotle when discussing the younger generation is “They think they know everything, and are quite sure of it”, the less cited is the one from Socrates who said some 50 years earlier “The children now love luxury…they show disrespect for elders”. In philosophical terms, Socrates is Aristotle’s grandfather, and I can’t help but wonder what in 400 B.C. the equivalent of ‘OK Boomer’ would have been from Aristotle at the critique of his generation.

Fast-forwarding nearly 2,500 years, the current generational gripe is largely along the financial advantages afforded the elder generation and the spendthrift nature the younger generation is accused of.

A recent study done by the Institute of Fiscal Studies (Crawford, R & Sturrock, D ,2019, ‘Should generations differ in their wealth accumulation?’) looked at the drivers and implications of where this wealth inequality has arisen. The findings were as follows:

  • The younger generations have seen steady increases to their Gross earnings, in excess of inflation, whilst benefitting from a tax-system that on average sees those born before the 1960s subject to more direct personal taxation than those born during and after. For those scoring, that’s a point to the Baby Boomers.
  • The State Pension has a much lower ratio of replacement income for younger generations, but this is largely down to the increase in life expectancy and the length of time the state pension will need to be paid for. Less guaranteed income in retirement but longer life, let’s just call this one even.
  • When comparing the average rate of return on cash savings, investments, and property that each generation has received during their working life. The younger generation has seen an incredible decline in average rate of return. Those born in the 1980’s has so far experienced an average rate of return that is over half what those born in the 1930s and 1940s received during their lifetime.
  • This point comes with a slight caveat that the financial crisis in 2008 looms large over the average rate of return for those born in later years and the hope/expectation would be a return to the median over the course of their lifetime. However, this is a big point to the younger generations’ argument of declining wealth due to adverse conditions.
  • Perhaps the biggest surprise, is that when comparing the average savings rate of wealth between the generations the apparent ‘spendthrift’ generation of the 70’s & 80’s saves an adjusted 12% of disposable income, whilst those born in the 1930s and 1940s only saved 5% of their same adjusted income.

Effectively the younger generation does have more disposable income than previous generations, however the label of ‘spendthrifts’ does not seem to be born out as they tend to save more on average than previous generations. The issue lies in the fact that the average return they have got on these savings is far below that of previous generations and the amount of private wealth they will need in retirement is a lot higher.

Rather than continuing the argument that Socrates and Aristotle were having 2,500 years ago, from a financial planning perspective each of the generations could look to take the following actions to mitigate this financial inequality:

  • The older generation can play a vital role in education and early investment for future generations. Grandparents starting early investments such as Junior ISAs or Junior SIPPs for their grandchildren can make an enormous difference to avoid any future wealth inequality.
  • For those at or approaching retirement, you have the double whammy of your long-term return being impacted by the financial crisis with decreasing capacity to take the necessary risk to chase higher returns. You are also the first generation that will have an ever-increasing burden to fund retirement from private wealth. Coming up with a financial plan, that encompasses a decumulation strategy and appropriate investment strategy, will be paramount to sustaining your wealth.
  • For the younger generation, investing your surplus savings and maximising the return on these assets is your best tool to avoid this wealth inequality. As an asset class, shares have historically offered the greatest return and investing in an appropriate strategy that exposes you to this asset class at a level that you’re comfortable with is key. This includes reviewing the investment strategy of your pensions as an absolute priority.

If all the above seems Greek to you (pun intended), then luckily our financial planners would be happy to discuss any of the above with you.

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action. Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.

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