Australia’s great wealth transfer: Why inheriting millions isn’t a financial plan

As the two- to three-decade transfer of up to $5.4 trillion in wealth from Australia’s Baby Boomers to younger generations starts to get underway, a warning has been issued for both sides to be wary of a silver spoon’s potential dangers.

Those handing down assets should ensure the recipients understand how best to handle and invest the inheritance, and the heirs must be determined that the prospect doesn’t sabotage their own schemes to make money.

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“First of all, those relying on inheriting money have to realise they might not actually end up getting it,” says investment strategist and podcast host Scott Phillips, author of the new book The One-Page Investing Plan. “There could be family breakdowns, divorce, remarriage, estrangement … lots of things could get in the way.

“And then, if you haven’t spent a lifetime developing good habits around looking after, maintaining and investing money, and making mistakes with small amounts early on, it’s too easy to blow it.

“If it feels like free money, then it’s easy to spend it on a new car, renovating the kitchen and a big holiday, rather than looking after it for future outcomes.”

The beneficiaries of parents’ or grandparents’ largesse are also unlikely to have developed qualities like resilience with money. A market dip or crash, or a fall in property prices, can then lead to panic and bad decisions.

“So it’s much better for younger generations to save and invest for themselves from an early age, to learn the skills, develop healthy habits, and gain experience,” Phillips says. “Then when, and if, the inheritance comes, it’s a lovely bonus rather than a complete financial strategy.”

Former financial advisor turned financial educator Melissa Brown says a reliance on an inheritance can be dangerous: a parent might live to 95 and need a lot of care, which can devour savings; they might remarry into another family when widowed; or you could simply fall out and be cut from the will.

“You should think of an inheritance as the cherry on top rather than the whole cake,” says Brown, the author of Unf*ck Your Finances. “Particularly if you’re young, you have the power of compound interest and time on your side.

“You don’t need a lot of money, but you need to be proactive and invest regular small amounts now rather than later. If you’re 20 and invest $250 a month, that’s $1 million over 40 years. You don’t want to inherit a large amount when you haven’t practised on smaller sums first.”

The main asset being passed down, however, is likely to be the family home, which the younger generations are likely to simply move into, believes economic futurist Evan Lucas. That might be their entry into the property market, or it might mean they will put their existing home up for sale or put it on the rental market.

“But what will they do with the capital from other assets, like their parents’ superannuation?” Lucas asks. “Their financial education often isn’t great, but it might depend more on which generation they are a part of.

“Gen X-ers have worked for a while so they’ll have super of their own, while Millennials tend to prioritise working hard and looking after their wealth. But Gen Z is different, and we know that they often spend on themselves, particularly on health-related items like gyms, retreats and supplements.”