Filling the knowledge gap for the young affluent

Wealthy baby boomers are retiring and the ‘Great Transfer’ of wealth is well underway. Yet, according to the 2012 U.S. Trust Insights on Wealth and Worth Survey, more than two-thirds of parents believe their children are not adequately prepared to handle wealth. This is not surprising because managing wealth isn’t generally taught by our education system and is often not discussed within the family.

It is common for young adults of affluent families to start receiving money in their twenties as beneficiaries of estates and trusts and many are ill equipped to make sound financial decisions with the capital. Conversely, adult children of wealthy families may have misconceptions regarding entitlement to family wealth and/or the relationship any wealth transfer might have on their planned lifestyle.

NextWave is Newport Private Wealth’s initiative to fill the knowledge gap for young adults to become better equipped at managing wealth through a series of discussions tailored specifically to this demographic and present these topics in a way that resonates with these young adults.  The following are concerns among young people that will be discussed in NextWave’s series of upcoming financial workshops.

1. Inheritance is a gift, not an entitlement

The amount of family wealth passing to the next generation will likely be less than originally projected. This prolonged weak economic cycle and historically low interest rates have strained the budgets of retirees requiring them to encroach on capital more than expected. People are living longer and health care costs are increasing. Wealthy families are considering philanthropy more in their estate plans and are twice as likely compared to the previous generation to leave a portion of their estates to charities according to the U.S. Trust survey. Heirs should not plan for a life-altering amount of capital. Many self-made wealthy individuals want their children to experience the joy of striving and succeeding in whatever path they choose. The concern is that receiving a large inheritance will destroy a child’s passion to pursue that dream.  Don’t expect a large inheritance and plan your finances, accordingly.  Inheriting money or other assets is a gift, not an entitlement.

2. Goal setting sets the path to success

Establishing goals up front is critical to financial success regardless of age. Unlike their parents whose focus might be retirement affordability, young adults are just beginning their financial journey and have significantly different goals – starting a career/business and family, travel, buying a house, etc. Think broadly in terms of values when setting goals. Identify end-goals and set shorter term markers to help ensure you are staying on the right path.

3. Budget and live within your means

Children of wealthy families are often fortunate in having a financial backstop to give them a leg up, if needed, but they must learn to live within their means. This starts with proper budgeting and sticking to it. Young adults should be accumulating assets not depleting them. Setting a budget and sticking to the plan is the first step to building wealth. Learning to balance your finances between spending, saving and giving is the key to achieving long term goals.

4. Renting vs. Owning

Buying a home in this expensive market may only be affordable by taking on a significant mortgage. Is it better to wait and save more to increase the down payment?  What are the risks if interest rates rise? Are there other financing alternatives? If I buy a home with a significant other, how do I protect capital invested in a home from potential claims under the Family Law Act?

5. Protecting capital in a marital breakdown

Over 40% of marriages end in divorce in Canada (Statistics Canada) and many young adults were part of these families. What are some of the financial issues surrounding marriage, divorce and common law? Do I need a prenuptial agreement?

6. Saving taxes saves money

Good tax planning is an effective form of saving. As students, young adults were aware of tax deductions for tuition and education, but as they enter the workforce other tax deductions might now be available (e.g., moving or commission expenses, RRSPs). Graduated or marginal tax rates may provide income splitting opportunities to reduce the family tax bill.

7. An estate plan is more than just about me

Many young adults don’t believe they need to consider their estate plan. As a shareholder in a family business or a beneficiary of a trust or estate it is important to have a will and powers of attorney and an estate plan that dove tails with that of other family members. Life insurance may be appropriate and inexpensive at a younger age.

8. Networking is a key to success

The weak economy has been difficult for younger adults looking to make their mark.  Networking and building relationships is essential to help navigate through these uncertain times. NextWave will provide an opportunity for networking, learning and sharing ideas with like-minded peers.

NextWave will be holding its first session on Wednesday November 28th providing insights on some of the concerns listed above. If you are interested in learning more about NextWave or your adult child wishes to attend, please contact Caitlin (cchapman@newportprivatewealth.ca) or Kevin (kdean@newportprivatewealth.ca).