In June, AUSIEX released a report, On the Precipice of Change, that found Australia’s intergenerational transfer of wealth is happening faster than projected, with most Baby Boomers set to retire by 2028.
AUSIEX added that this faster pace will also change the demand for some investment products, services, and financial advice.
“Within five years, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but left the workforce by 2028,” the report said.
“It doesn’t stop there. In 2027, the first of the Baby Boomers will reach their statistical age of death (81 years for men and 85 years for women).
“The impact on the wealth management industry is, first, that Baby Boomer superannuation balances will start to deflate out of the system through retirement consumption and then through disbursement via the inheritance process.
“Second, Gen X are now the group preparing for retirement and will hold the large balances in superannuation. Third, Gen Z will soon be fully deployed in the workforce and the predominant demographic groups requiring to be serviced by the wealth industry will be Millennials/Gen Z.”
Following up this report, AUSIEX chief executive Patrick Salis said that COVID-19 has seen many older people reassess what they want going forward, a big part of which is determining how to provide for the next generation.
“Put simply, we’re at the end of the Boomer phase and the beginning of the Millennial/Gen Z phase. The wealth management industry will deal with the Boomers retiring, the transition of Gen X to being the elders of the workforce, and the rise of the Millennials/Gen Z,” Mr Salis said.
“The way it will do this is to change its products and services, and in today’s digitised world, that means primarily through changes in technology.”
The exit of the Boomers from the workforce means that for the first time in its history, the retirement system is going to see retirement phase withdrawals from its largest accounts. AUSIEX noted that those in the 60–64 age group have an average balance of $323,000 compared with the younger generations where those in the 30–34 age group have an average balance of $45,000.
“The system is still in net positive contributions with positive inflows being supported by increases up to 12 per cent in the mandated participation rate, we have seen flat to decreasing returns, benefits payments out of the system are increasing, and inflation is going to put pressure on the cost of living,” Mr Salis said.
“Among all this volatility, all we can say with certainty is that there is change happening and that more monitoring is required to track how the system and regulators respond to the changes that have been identified in this paper.
“With almost universal participation in some form of investment through superannuation and over 35 per cent of Australian adults holding investments on an ASX Chess account, direct and indirect investment in shares in publicly traded companies was a bedrock of the Baby Boomer retirement preparation phase, and it will continue to be the bedrock of wealth management for all the generations that come after it.”
Another key factor for the wealth management industry is that because Gen Z will be fully deployed into the workforce, the predominant demographic groups needing to be serviced by the industry will be Millennials/Gen Z.
“Baby Boomers exiting the economy creates significant costs for the remaining generations as they stop providing free services such as family-based childcare, and they also require increased medical care,” Mr Salis said.
“As an example, while accounting for only 21 per cent of the adult population, half of Baby Boomers have a long-term health condition which accounts for 34 cent of all adults in the population that have a long-term health condition. These are costs that will need to be paid for by the younger generations.”
He added that the Millennial/Gen Z generations also have far more grim income and financial prospects than those who came before them.
“A recent Pew Research study found that when asked how children in their country will fare financially when they grow up, a median of 70 per cent of adults across 19 countries (72 per cent in Australia) say they will be worse off than their parents,” Mr Salis said.
“The recent burst of inflation, plus the focus on stifling wages growth that reduces their purchasing and savings power, could mean that their prospects are even more difficult.
“The superannuation industry does not escape this change. A 2017 study by the Financial Services Council also found that even though 70 per cent of Millennials had a superannuation account, they are uninterested and unengaged with it.
“We have a new generation entering the system that has low expectations of being able to build wealth, strong indicators that suggest that it is indeed true that they have lower economic prospects, and they are also disengaged. This indicates that there will be a considerable cultural shift in how and why the younger generations engage with the wealth management industry, and how the industry attempts to engage with them.”
Of course Millennials are disengaged from super, they can’t touch it for decades so why worry about it now? For their parents, Wills with Testamentary Discretionary Trusts are going to be very important, to help protect their kids from wasting their inheritance so that it can go the distance to help with living expenses, mortgage payments, etc – all the stuff that the money gone into compulsory super can’t help them with.