The institute of fiscal studies in the UK (IFS) have published their findings into a study that is reported to have concluded that the rich are getting richer.
The study finds that younger generations are much more likely to receive an inheritance than their predecessors. Specifically the report found that people born in the 1970’s are twice as likely to either inherit in the future or to have already inherited money compared to somebody born 30 years earlier.
But it is not just that the younger you are the more likely you are to inherit, it is also that there is evidence to show that of those inheriting money they are getting more than previous generations. Of people aged over 80 back in 2002/2003 it was found their real wealth after pensions was £160,000 versus £230,000 10 years later.
Where the real disparity comes in is the inequality of the distribution of wealth. The study shows that 2/3rds of people who are in the top quintile of earners (top 20%) have benefited from an inheritance compared to only 1/3rd of the bottom quintile.
Not only that but the more money you earn yourself the more money you tend to inherit, again the same top 20% of earners managed to inherit 4 times as much as those in the bottom 20% of earning bracket.
Why is this? I would believe it is potentially because if you come from a more financially secure background you may be afforded more opportunities in life, things like private schooling and 3rd level education and even access to opportunities in the workforce. i.e. who your family knows in business or good old nepotism.
But it probably goes a little deeper than that. The bank of mam and dad can be quite useful growing up, if we take our own situation here in Ireland and the current mortgage rules. Having to raise a 20% deposit is much easier when you have the bank of Mam and Dad available to you, meaning you are more likely to get on the property ladder in the first place.
But this widening of the wealth gap also comes down to simple arithmetic. If you think that your parents own a house worth €1million and your friends parents own a house worth €100,000 if property prices go up 10% you just made an extra €100,000 versus your mate earning an extra €10,000. The worlds wealth increasing because stock markets, like the S&P 500, are up over 250% in the last ten years makes a big difference.
I have also found that clients of Prosperous are more willing to take financial risk with things like starting up businesses or expansion of their own business or other investment opportunities when they have financial security. Be that in the form of their own savings or wealth in the wider family to fall back on if needs be. This results in them having more access to the potential of success.
But sometimes they don’t even need success to remain wealthy. Take Donald Trump as an example. Forbes magazine believe he inherited $40 million in 1974 (Trump says it was $5 million) Forbes did extensive research to show two things firstly that Trump is worth around $5 billion today (Trump also says this is way too low) and secondly that if he had of just invested the money in the stock market the Don would be worth $15 billion today.
Regardless of success or failure the rich most certainly are getting richer. Ten years ago the top 1% owned 40% of the world’s wealth, that figure is now believed to be 50%.
But what the rich earn is also increasing. In early 2013, Oxfam reported that the fortunes made by the world’s 100 richest people over the course of 2012 – roughly $240 billion – would be enough to lift the world’s poorest people out of poverty four times over.
Although the IFS report is focused on the UK there is evidence that it applies here in Ireland too. The fact that our government has increased inheritance tax thresholds in the last two successive budgets shows that there is pressure on them to do it.
We also see it here in Prosperous Financial. Clients who are in the 50’s regularly ask us when we are building their financial plan to allow for the fact that the children will at some stage need a dig out whether for a house or some other capital injection.
On the flip side we have clients in their 30’s and 40’s who are expecting an inheritance and ask for it to be built into their financial plan. This can be worrying, because the success of some people’s financial plan is dependent on this inheritance and therefore the kids have to live in hope that the parents don’t go blowing the cash on themselves in retirement!
But if your parents aren’t loaded and your granny wasn’t either don’t write yourself off completely there are plenty of people who weren’t born into a super rich family and have done ok for themselves, take:
· Howard Schultz, the CEO of Starbucks who is worth €1.1billion.
· Roman Abramovich, who owns the world’s largest private yacht was an orphan at age 4.
· JK Rowling lived on welfare before writing a few books and is now worth $1 billion.
· Sam Walton or ‘Walmart’ milked cows for a living before Walmart.
· Steve Jobs.
· Alan Sugar.
The list goes on.
If you don’t however have a genius book in you or a recipe for good coffee, research from Canada has shown that people who engage a financial planner have twice the net worth of people who don’t when they retire.