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Can inheritances solve the financial problems of millennials?

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Millennials are preparing to receive considerable inheritances from the richest generation in history. Will it be enough to save them?

Can inheritances solve the financial problems of millennials?

It is no secret to anyone that the millennial generation faces more frightening economic and financial challenges than those faced by past generations. They are the first generation of the postwar period that has it worse, economically speaking, than the generation that preceded them.

Leer en español: ¿Podrán las herencias solucionar los problemas financieros de los millennials?

There is, however, a hope that could alleviate the enormous financial burden of the millennials, whose debt in the United States, according to Bloomberg, exceeds one trillion dollars ($ 1,005,000,000,000 to be exact). The parents of this generation, called baby-boomers because of the birth explosion that followed the Second World War, are the richest generation in history, and as they grow older they would leave their riches in the hands of needy millennials through of inheritances.

Also read: Are you millennial and unemployed? Break the stereotypes

A study by the Royal Bank of Canada estimated that in the United Kingdom and North America, baby boomers will pass $ 4 billion dollars to millennials, which could be a record for the largest generation inheritance in history. This money far exceeds the cumulative debt of millennials, but the picture is more complicated than it seems, and millennials will find it difficult to convert this money into financial tranquility if they receive it.

Some positive perspectives

According to Paul Donovan, chief economist at the Wealth Management division of Swiss bank UBS, millennials are on the way to becoming the richest generation in history.

"Wealth is still there, in the economy. As it passes through the generations, the fact that the millennial generation is smaller means that the same wealth will be distributed among a smaller number of people, "argues Donovan.

In addition, other studies of the real estate market in the United Kingdom and the United States indicate that if the transfer of wealth were carried out today it would add $ 7 trillion in the United Kingdom and up to $ 32 trillion in the United States, at a global level the figure could reach the $ 217 billion. Surely that will be enough to get an indebted generation out of trouble.

Most conservative estimates

The first problem is that this massive transfer of wealth will not happen today, it will happen perhaps in 20 or 30 years, according to Donovan, and from that moment it can begin to dissolve.

The majority of this money is tied to real estate assets, and the instability of this market means that the real value of the properties is not defined, it is susceptible to speculation.

The other concern is that from here to begin to enter the inheritance, the boomers will probably have spent a significant part of this money because in many cases is intended for retirement.

As the bulk of the boomer population enters retirement age and funds begin to yield lower pensions in the face of increased population pressure, these will begin to be financed through their personal savings and the sale of their assets, particularly real estate. This means more modest inheritances without even having contemplated the risk posed by inflation to the real value of the transfer.

"A model for 1%"

According to Moritz Schularick, professor of economics at the University of Bonn in Germany, quoted in a BBC article, assumptions such as Donovan's only apply to the wealthiest.

"It is a model for the richest 1% globally. Only applies to people who have so much money that they could never spend it all, "he said. "Normal people – and standard economic models – assume that people save for old age and use their savings and wealth to pay for goods and services in the absence of a monthly income. Only in the end could there be something left over for an inheritance, "he added.

Keeping in mind that life expectancy worldwide is higher and that boomers will be taking advantage of important medical advances, they will have more time to spend the wealth they have accumulated during their lives.

For Latin America, where research is needed on the subject, this could be the key constraint. Lower wealth, distributed among a similar number of people, with a higher inequality rate means that the outlook in Latin America is more turbid.

 

LatinAmerican Post | Pedro Bernal

Translated from "¿Podrán las herencias solucionar los problemas financieros de los millennials?"

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