Will longer retirements shrink the great wealth transfer?

The great wealth transfer is coming. Or is it? 

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Rising life expectancies may suggest the heirs waiting in the wings could end up with far less than expected — not because the money disappeared, but because their parents are spending it on longer retirements. 

For advisors, this means a more nuanced conversation with clients is overdue: What if retirees live long enough that far less wealth is transferred to heirs than families expect? 

Salvatore “Sal” Capizzi, chief sales officer of San Diego-based hybrid RIA Dunham & Associates Investment Counsel, has watched an increasing number of adults live well into their 80s and 90s and expects this trend to accelerate. 

Yet, “we are all still banking on this great transfer of wealth,” he said in an interview with Financial Planning.

Retirement formulas often account for 20 or 25 years beyond age 65, he said. With an increasing number of clients staring down the potential to live past 100, “[Age] 105 and 115 is the 40 and 50 year retirement I should be planning for,” he said. “But we’re still using the same 20- to 25-year solution.”

Longer client lives also mean a greater risk of exposure to external factors that affect a portfolio, including inflation. Capizzi points to food costs as one example: A couple spending $19,400 a year on food today could spend about $2.6 million on that expense alone over a 50-year retirement, according to his calculation, as inflation compounds. In a blog post, Capizzi argued that “traditional retirement planning may no longer suffice for modern retirees facing decades of inflation across all expense categories while potentially living 40 to 50 years in retirement.”

Capizzi also likens the anticipated wealth transfer to seeing what appears to be a city in the distance during a road trip. 

“As you get closer and closer, it [the city] disappears,” he said. “You thought it was a city and it was just a mirage. We are living in that same type of situation.”

READ MORE: How sudden inheritances can hobble next-generation heirs 

The transfer may be delayed, not diminished

Longevity may be rising, but some advisors argue the issue is timing, not whether wealth will ultimately reach heirs. 

Michael McMeans, president of Columbus, Ohio-based Silverling Financial, said in an email that wealth will still pass into the hands of future generations whether or not clients are living longer lives. 

“Where there is longevity, the transfer may be protracted or slower,” he said. “But those same people are gifting to the next generation as well.”

Brandon Angotti, vice president at Norwalk, Connecticut-based Union Savings Bank, agreed with McMeans in an email. Longer, healthier lives mean “the great wealth transfer will be spread out over a longer period of time than is currently being discussed,” he said.

Some clients have wealth that exceeds what they can spend in their lifetimes — even very long lifetimes. In these cases, Angotti’s team encourages them to “start a strategic gifting strategy now to reduce their estate and allow family members to enjoy the funds now as opposed to receiving a large lump sum years or decades in the future,” he said.

READ MORE: When wealthy clients don’t trust heirs with the money 

Multigenerational retirements could create new planning challenges

Capizzi also foresees a shift away from traditional sandwich-generation dynamics. As parents live longer and healthier lives, the middle generation may reach retirement age while still helping to support them, creating multiple retirements that need to be funded simultaneously.

For advisors, according to Capizzi, the response starts with reframing the retirement conversation entirely — moving away from a fixed endpoint and toward a rolling, multi-decade plan that accounts for the possibility that multiple generations may be drawing down assets at the same time. 

“Suddenly, we have this concept of multigenerational retirement, where one retiree is now going to be supporting one or two generations of retirees,” said Capizzi. “What is the one thing they did not receive? They never got an inheritance. That great wealth transfer never occurred because they spent the money.”