Have you heard the term “shirtsleeves to shirtsleeves in three generations”? It refers to the trouble of building generational wealth: The first generation builds wealth, the second generation spends it, and the third generation gets nothing.
If you’ve spent years saving and investing wisely to prepare not just for your retirement, but to build a legacy of wealth that you can share with your children and other descendants, then this is probably not what you have in mind.
But statistics bear out the old saying. In fact, it’s reported that 70% of wealthy families lose their wealth by the second generation, and 90% by the third.
What is meant by generational wealth?
This refers to passing along anything of monetary value—whether that’s investment accounts, real estate, or other assets—to family members. It’s a pay-it-forward mentality of preparing your loved ones (including members of your family who haven’t even been born yet, and whom you may never meet) for their future financial needs, and the general intent is that what you worked so hard to build will inspire a generation-spanning legacy.
Unfortunately, too often this doesn’t appear to be what happens. But there are steps you can take in an effort to preserve family wealth.
First, grow wealth.
This is clearly a no-brainer, but if you haven’t already, start building today with an eye on your legacy. The mindset is a bit different than that of simply saving for retirement, where you may be more concerned with covering your financial expenses when you’re no longer commanding a salary.
Some tried-and-true strategies:
- Include your wishes to leave a legacy in your financial plan: Your financial plan takes into account every aspect of your financial life at every phase. It’s not just about budgeting or retirement, but about mapping out your journey and keeping you on track to meet your financial goals.
- Invest wisely: One common recommendation is that you invest in the stock market, arguably one of the ideal ways to build wealth over the long term. Some investors also consider investing in real estate. Discuss the best investment options for you with your wealth advisor.
- Save, don’t spend: Put aside as much as you possibly can. When you receive investment distributions or other income sources, place it in tax-advantaged accounts where it can grow.
Second, institute a family policy that promotes financial literacy.
Some people just don’t like to talk about money with their children or other family members. But a financial education—starting when kids are as young as possible—needs to be part of your generational wealth building plan.
Consider that it’s your responsibility to guide your heirs about personal finance and other money-related issues. This does not mean dictating your financial values, per se, but it does mean being open with your family members about what you have, what you envision for your wealth, and what your expectations are with regards to how they manage their inheritance.
If you own a family business, add your wishes for the business to your discussions with your family members. Communication is a critical part of preserving generational wealth.
Third, put things in writing.
Creating an estate plan and a will is a big part of this. Whatever you discuss with your family about your intentions for wealth, back it up in written form. This will ensure that there is zero question about what your wishes are.
“In writing” includes specific legal documents, as well as other documents that spell out your intent:
- A will or trust
- A durable power of attorney
- Life insurance policies
- Beneficiary designations
- Letter of intent
A qualified wealth advisor can help you start building and preserving your generational wealth today. Contact Ironwood Wealth Management to learn more about our financial planning process.