Inheriting the Wealth of Baby Boomers: What It Means for Millennials

The baby boomer generation is the wealthiest in U.S. history, with an average net worth of $1.2 million per person.¹ This high average is likely due to some baby boomers (born from 1946 to 1964) having extreme wealth, which skews the numbers. Regardless, it’s clear that tens of millions of dollars will be inherited by younger generations, particularly millennials (born from 1981 to 1996), over the next few decades.

This wealth transfer could significantly impact the younger generation. Baby boomers hold 51.8% of the total U.S. wealth, while millennials own only about 9.2%, despite similar population sizes.² Receiving a large inheritance, especially when you’re relatively young or don’t expect it, can be complicated and confusing — affecting emotions, goals, and priorities. If you’re a millennial in 2024 and just inherited a large sum of money, at an age between 28 to 43, you may be grieving a major loss while also facing choices that will change your lifestyle and family goals.

Whether you’re a baby boomer or a millennial, understanding the effects of transferring significant wealth — timing, amount, taxes — is crucial for planning and strategizing for minimizing potential negative outcomes. If you are a millennial and want a detailed guide on how to navigate newfound wealth, download this white paper, Suddenly Inheriting Wealth In Early Adulthood or Midlife.

Below are answers to three questions that tend to come up during estate planning conversations with families.

1. How much of a financial impact will there be?

Here are three perspectives on managing a $1 million inheritance:

Life+: The approach known as Life+ offers a sense of security by converting a lump sum into a cash flow stream to supplement your income for the rest of your life. This technique, widely used in retirement planning, is based on the 4% rule. According to this principle, withdrawing $3,333 per month or $40,000 per year (4% of the principal balance) from a diversified investment portfolio for 30+ years has a low risk of depleting the funds. Common uses for Life+ planning include:

• Down payment on a vacation home and covering the mortgage and maintenance expenses.
• Charitable donations or other gifts.
• An annual travel budget, buying a more expensive home, or paying down debt to free up cash flow for future savings or other items.

You Only Live Once (YOLO): The YOLO approach is about embracing the present and spending the money on what brings you joy. This could mean spending all or a portion of the funds within a few years. The math is straightforward, with the entire balance being spent, donated, or invested immediately or over a brief period, such as $100,000 per year over 10 years. Typical uses include:

• Charitable giving to support a cause important to you (or the deceased).
• Enjoying life through a dream vacation, world travel, or an extended family sabbatical.
• Investing in yourself by starting a business, returning to school, or exploring a passion.

Financially Independent Retire Early (FIRE): The FIRE movement emphasizes minimizing expenses to save a sizable portion of your income, allowing you to retire early. The aggressive savings and more modest lifestyle allow you to accelerate reaching a significant goal, such as retirement. If this is your goal, consider saving your inheritance for when you stop working.

When considering these scenarios, take note that if you are 35-years old and have inherited $1 million, the Life+ scenario assumes your investments could hypothetically provide an annual income of $40,000, assuming a market return of 7.2% per year. With that rate, the investment could grow to $2 million in 10 years and $4 million in 20 years, resulting in $160,000 in annual income beginning at age 55 based on the 4% rule. Please note that future investment performance cannot be guaranteed, and all investing involves some degree of risk.

Which path will you choose? Blending these strategies together and finding a happy medium is where the “art” meets the science of investing.

2. When and how will the inheritance transfer?

The most common types of asset transfers are outlined below:

3. What are the tax implications?

Tax implications vary; we’ve outlined below treatments for the most common forms of property transfer:

• Inherited property: The cost basis for bequeathed stocks, property, or other investments is typically the fair market value of the asset on the date of the decedent’s death, significantly limiting the capital gains tax you may owe when selling the asset.

For example, the decedent purchased Apple stock for $20 per share in 2013, which was worth $200 per share upon their death. While they were alive, the cost basis of the stock was $20. That means if they sold the shares at $200 per share, they would have paid capital gains taxes on the profit of $180 per share. However, at the date of death, this asset is “stepped up” in cost basis to $200. If it’s sold by the heir at $201 per share, capital gains tax applies to the new basis — just $1 per share.

• Life insurance: Payouts are generally not taxed, although interest earned on the payout is.
• Individual retirement accounts (IRAs): Funds in an IRA or 401(k) are tax-deferred, with taxes owed on distribution treated as ordinary income. Inherited IRAs, especially from non-spouses, have required minimum distribution (RMD) rules that can lead to significant tax liabilities.
• Estate taxes: If the deceased’s assets exceed certain thresholds, the entire estate is subject to tax. Current federal estate tax rates range from 18% to 40%, with an exemption amount of $13.61 million per individual (as of 2023). The current exemption amount is scheduled to “sunset” at the end of 2025 and revert to an estimated $7 million per individual (adjusted for inflation). The maximum federal estate tax rate will remain 40%. Several states have additional estate taxes as well. Estate taxes are paid at the estate-level, not by the beneficiary.

Making a plan

Now is the time to move forward with a plan. If you are a baby boomer planning your estate, consider the impacts of leaving your inheritance to a beloved millennial — do your best to ensure there’s a strategy for minimizing the challenges, tough decisions, and taxes. Include them in conversations with your wealth advisor or estate attorney. Not a Mercer Advisors client and want to know more? Let’s talk.

If you’re a millennial who has inherited wealth, or expects to inherit wealth in the near future, and find yourself wondering how to navigate the complexities as well as seize the opportunities, we’re here to help you build a comprehensive wealth management plan. Get in touch.

1. “The Average Baby Boomer Has a $1.2 Million Net Worth – See How You Stack Up,” Yahoo!Finance, Oct. 6, 2023.

2. “Wealth distribution in the United States from the first quarter of 1990 to the fourth quarter of 2023, by generation,” Statista, April 11, 2024.

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