I’m 55 years old and have had the following conversation many times.
Me: “Hey man. Good to see you. Sorry to hear about your mom.”
Friend: “Thanks. She lived a long life, but the last year was rough. Whoever coined the term “golden years” never lived with an older person. She is in a better place now.”
The following conversation is one I have NEVER had.
Me: “Hey man. Good to see you. Sorry to hear about your mom.”
Friend: “Thanks. She lived a long life, but the last year was rough. She did leave me a million-dollar portfolio, five-bedroom house, and two rental properties. So, you know, makes it a little better.”
I love the stock market and enjoy studying companies and the economy. My friends know this, and we frequently talk about the state of the world over a couple of beers. The following question often comes up, “Wow. People have tons of money. Where is all this cash coming from?” The often-overlooked answer... An inheritance. Or more precisely, 2 or more inheritances. Baby boomers and their parents are leaving behind a vast fortune. Knight Frank, a real estate consultancy firm, estimates $90 trillion will be handed down from one generation to the next over the next 20 years. This massive number may be an underestimate because lots of money is gifted before death. Young people have education costs covered by grandparents, and down payments for houses are frequently gifts.
People are uncomfortable talking about it. It does not fit nicely into the narratives we tell ourselves. Get a good education, work hard, and get ahead. We like that story. Grandma died and left me a fortune so I’m doing great is not the story CNBC wants to tell. In the micro, talking about a received inheritance and, even worse, a potential future inheritance makes you sound like an asshole. Nobody wants to say, “My Mom is sick and might be on her last year. Therefore, I’ll buy a bigger boat next year.” Asshole!
We talk about sex and religion more than inheritance. Wealth transfer is a big deal and growing more important each year. Decade long trends are driving inheritance higher and will continue. Old people are the richest segment of the population. The birth rate has dropped dramatically all around the world. Government retirement programs are generous and allow middle class retirees to save. Property values and stocks have been in long bull runs. 50 years ago, Grandma died with little money and 20 grandkids. In 2050 Grandma will die with a fortune and two grandkids. The number of people with no kids keeps climbing. Many of them will leave money to nieces and nephews. Social norms we have handed down from generation to generation no longer make any sense. For example, senior citizen discounts should be relabeled rich people discounts. Grandma living in her kid’s basement is a thing of the past. Old people are rich.
If you study stocks and the economy, you cannot ignore wealth transfer. It is a big part of financial life and growing in importance. I love housing stocks (Toll Brothers and PulteGroup are my favorites). The United States needs more houses. We are in a long housing boom that will last another 10 years. A counter argument is that housing has become unaffordable because young people cannot cover the mortgage on their income. But it does not work that way because young people don’t buy houses on their own. They have grandparents that gift 20% or more and they use that money to cover the down payment and lower the mortgage. Middle-aged people buy new houses with cash from their inheritance. It might make you uncomfortable or mad, but that is the reality.