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By Mel Casey, CFA

Millennials (those born between 1981–1996) are now the single largest generation group in the U.S., having surpassed baby boomers (born between 1946-1964), 72.1 million to 71.6 million, as of 2019. Much has been written of the varied challenges facing millennials, whether it be the trauma of global events like 9/11 and the Great Financial Crisis, being saddled with burdensome levels of student debt, or the loss of trust in societal institutions due to growing wealth inequality and a perceived double standard in criminal justice.

Mel brings nearly two decades of financial services and investing experience to the FBB team. As a Senior Portfolio Manager, Mel is responsible for managing client relationships and client investment portfolios.

A native of Dublin, Ireland, Mel received his Bachelor of Commerce degree from University College Dublin. He is a CFA®, and CAIA charterholder, a member of the CFA Institute, and a member of the CFA Society of Washington, DC.

Mel Casey

There has long been a narrative that millennials are somehow losing out on the American dream, that the odds are stacked in their favor and traditional avenues for success are no longer open to them. There is, however, a contrasting narrative: that we are in the early innings of a transfer of between $30 trillion and $68 trillion from the baby boomers to millennials over the next decade. Investment professionals may ponder what implications this can have for markets and the industry, but how should millennials themselves approach this transfer and what should they be thinking about as they take on this new role within the distribution of U.S. household wealth?

Millennials have grown up in a digital world like no generation before them.

Recent episodes such as ‘Meme Stocks’ demonstrate that millennials are happy to embrace the financial markets at a relatively young age, even if in the form of a protest! Surveys conducted by the CFA Institute have shown that this generation saves and invests at a younger age than their predecessors, embraces disruptive technology both as users and investors (crypto, electric vehicles, ride-sharing, alternative proteins, etc.), and seeks out financial education proactively in order to achieve a feeling of agency over their own finances.

It is clear then that this is unlikely to be a group that would sit passively on their inherited wealth, disengaged from the investments, the investment process and the opportunity to affect change. We can expect significant shifts in investing priorities as this wealth transfer occurs. But as millennials become more influential in the economy and the markets, what are some of the likely priorities?

Values-Based Investing

It is understandable that a generation growing up in a world of continuous information flow would have a greater understanding of the myriad challenges facing our world and wish to invest in companies that are actively engaged in solutions to these problems. The good news for principled investors is that in an evolving marketplace, doing well and doing good need not be mutually exclusive.

U.S. companies are increasingly focused on highlighting their roles as good corporate citizens, so a diversified ESG- (environmental, social and governance) compliant portfolio is getting easier to construct. You could argue that we’re already starting to see some of this shift as large, mainstream investment firms, such as BlackRock, prioritize social change in their investments. An appropriate portfolio will likely contain a deliberate balance between newer companies engaged in emerging technologies, established companies who have steadily reformed their historic practices, and legacy companies who are evolving their business models to solve and capitalize upon these challenges.

Charitable Giving

Millennials should consider their tax liability as a social capital obligation. They may choose to pay this directly to the IRS in full or take appropriate charitable deductions and allocate some of that pool towards private causes that are personally meaningful. While there may be a great sense of urgency surrounding some of these causes, millennial heirs should consider that they generally cannot change their minds once a gift has been given. It is important not to give so much that it will impair the overall financial picture.

Gifting over time can also allow the asset base to grow and compound, allowing for a larger ultimate gift in the aggregate. Charitable remainder unitrusts are one estate planning vehicle to allow heirs to benefit from a regular distribution from the trust (typically a percentage of the market value) while the trust can still grow with a capital gains tax advantage as the ultimate beneficiary will be one or more named charitable organizations. Family foundations or donor-advised funds are other vehicles appropriate for estates of differing sizes.


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Taking the Right Approach to Risk

Although this demographic is viewed as being comfortable with risk-taking, it is worth noting that investor attitude toward risk varies greatly depending on the source of the wealth. Investors who earned their wealth actively through investing in or starting businesses, tend to have higher confidence in their ability to recoup losses or earn back lost capital than those who accumulated their means over their careers, or via inheritance. There can be a tendency for those who inherit wealth to exhibit greater loss aversion as they view this inflow as a one-off and feel uncertain of how they would replace it. There are competing instincts here given this is a demographic who generally understands emerging themes and feels comfortable investing in them, even if the company is small, new, or is currently unprofitable.

While taking on too much risk in investing is a genuine concern, taking too little is equally perilous. Longevity risk, or the risk of outliving one’s assets, is a real concern, particularly in an environment of rising inflation. Millennials should, upon inheritance, consider inherited assets and their own assets as the same, avoid the mental accounting bias of treating different monies differently and take a holistic view of their balance sheet, regardless of whether earned or inherited.

How Does it Fit with the FIRE Movement?

The FIRE or ‘Financial Independence, Retire Early’ lifestyle movement — popular among some millennials — ought to benefit from this large influx of wealth, right? Well, not necessarily. The objective here is to accumulate sufficient financial assets by around 40 years of age in order to live off the passive income, i.e., dividends and interest. While a large inheritance would significantly increase the size of the corpus generating this income, human nature is what it is, and the clear and present danger is ‘lifestyle creep.’ The financial discipline and minimalist lifestyle enabling the FIRE movement can be a lot harder to adhere to once-great wealth is transferred as opposed to earned. A decadent lifestyle coupled with a long time horizon (50 years +) doesn’t usually score well in a financial plan!

Use of Trusts

Many millennials who are inheriting lump-sums may feel the burden of making prudent financial decisions all at once and soon after losing a loved one. The timing of an inheritance may not always align well with the recipient’s stage of life, personal maturity or financial needs.

As millennials look to the future and their own heirs, they may consider taking a different approach. We don’t necessarily control when we pass from this life, but we can exercise control over what happens to our assets, even from beyond the grave. Millennials may wish to consider distributing to their heirs over time using an irrevocable trust. This can include commencing those distributions during their own lifetimes. Working with financial and estate planning professionals can help determine the appropriate structure and amounts.

Inheritance May be Less Certain Than You Think

One issue a millennial should consider is whether this promised inheritance will materialize at all. Baby boomers are expected to live 10 to 15 years longer, on average, than the Silent Generation before them, but these can be the most expensive years. The U.S. Centers for Disease Control and Prevention (CDC) says baby boomers are more stressed, less healthy, and have less health coverage than the same age group did a decade earlier. As life spans increase, wealth tends to be spent down, particularly in those final years as healthcare costs can spike.

The wealth of baby boomers need not be spent down on healthcare costs alone. Baby boomers spend more on travel and leisure than the generation before them. As we (hopefully) emerge from the COVID-19 global pandemic, there is a lot of pent-up demand for travel and experiences. Many baby boomers are expected to take a ‘carpe diem’ attitude toward their sunset years and get working on the many ‘bucket list’ items that have accumulated over the past 24 months. Inflation in travel costs has been particularly noticeable in the past year and we could see a multi-year surge in demand, which will impact what is left over for inheritance.

Best Advice: Keep Compounding!

The universal takeaway here is that regardless of your expectations of an inheritance, it behooves millennials to maximize the traditional tools for wealth creation available for them, whether they be 401(k)s, IRAs, Roth IRAs and 529s for those with children.

A windfall is always nice, but as things stand, millennials control only 8.4% of U.S. wealth as of the third quarter of 2021, according to the Federal Reserve. Not all members of this generation will inherit large sums, but they all share a long-term time horizon, and can utilize the tax-advantaged vehicles above to experience that ‘eighth wonder of the world,’ compound interest! Millennials can steadily make up that wealth gap over time through regular saving and taking advantage of periodic market volatility to accumulate solid, long-term investment gains regardless of what baby boomers have in store for them!

About the Author: Mel Casey, CFA®, CAIA

Mel brings nearly two decades of financial services and investing experience to the FBB team. As a Senior Portfolio Manager, Mel is responsible for managing client relationships and client investment portfolios.

A native of Dublin, Ireland, Mel received his Bachelor of Commerce degree from University College Dublin. He is a CFA®, and CAIA charterholder, a member of the CFA Institute, and a member of the CFA Society of Washington, DC.