When it comes to building wealth, growing your net worth is half the battle. Building lasting wealth involves creating a plan for how it will be transferred and passed down to the next generation. This is known as generational wealth.
Figures from Gobankingrates show that 70% of wealthy families lose their wealth by the next generation, with 90% losing it the generation after that.
“According to a recent UBS Investor Sentiment [survey], 83% of investors are concerned about transferring assets smoothly but only 40% said they’ve had discussions with heirs regarding their wishes,” says Kleo Curry, vice president of Wealth Management for UBS. “While investors overwhelmingly want their legacy transfer to go smoothly, inadequate estate planning and lack of communication can not only be costly but also lead to unresolved family conflict. As higher interest rates persist and inflation concerns continue, proper distribution of generational wealth is a hedge against the rising costs of living.”
What is generational wealth?
Generational wealth is essentially any kind of asset that is passed down from one generation to the next. This might include cash, investment funds, stocks and bonds, real estate properties, or even businesses. It’s projected that more than $80 trillion will be passed down from today’s older generations to their children and other heirs over the next two decades, but multigenerational wealth is not equal across the board.
The most recent Survey of Consumer Finances found that the typical white family has eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic family. This wealth gap can be seen across different areas of the financial industry because of the role that adequate wealth plays in consumer decisions and behavior. Wealthier families are less likely to be saddled with debt; they have an easier path to homeownership, and likely more capital to continue to grow their wealth through businesses and investments.
What are some challenges to building generational wealth?
There are several factors people across income levels, race, gender, and age face that make it more difficult, or in some cases easier, to build and transfer wealth from one generation to the next.
Differing levels of financial literacy
Building wealth and maintaining it takes a certain level of understanding that not every consumer has. Everyday money choices can add up and translate to long-term wealth if you’re being strategic. From selecting the right mix of assets in your investment portfolio, to understanding what kinds of savings vehicles to use for your personal savings or how to start your own business—having the knowledge in your back pocket can make all the difference. A 2021 TIAA report found that, as it relates to financial literacy and comprehension, many consumers (61%) understand borrowing-related concepts (the relationship between loans and repayment), however, financial literacy is lowest in the realm of comprehending and understanding risk and uncertainty—which can pose challenges during more volatile or uncertain economic times.
Substantial wage gaps
Disparities in pay across different racial groups play a role in each generation’s ability to build enough wealth to pass on. According to the most recent figures from the Department of Labor, Black workers earn $0.76 for every $1.00 a white worker earns. Hispanic workers, Native American/American Indian, Asian/Pacific Islander, and multiracial workers earn $0.73, $0.77, $0.81, and $1.12, respectively.
Unclear or undetermined plans for transferring wealth
Many families shy away from having conversations about what will happen to specific assets when a family member falls ill or passes away. “Start the conversation with your loved ones and heirs about money. A step forward to achieve this goal is to plan regular family meetings quarterly or semiannually,” says Curry. “The consistency of meetings provides an opportunity to reconnect and share the family’s vision for the future. The conversations also help the next generation learn and understand finances.”
3 ways to build and protect generational wealth
Your path to building wealth that lasts more than a generation or two will look different from everyone else’s, however there are certain strategies you can use to set yourself up to thrive.
“Understanding that each family might have their own vision of how they want that transfer to happen poses a significant planning opportunity, both for the generation that will be transferring assets as well as those that will receive it,” says Colleen Carcone, certified financial planner and Director of Wealth Planning Strategies at TIAA.
Don’t wait to start investing
Investing can be key to making your money work for you and grow over time. Even if you don’t have a ton of money to invest, starting with just a few dollars can add up to a significant cushion over time—one that you can pass down to your children or heirs. According to the Pew Research Center, even among families who earn less than $35,000 per year, one-in-five have assets in the stock market.
Investing isn’t only limited to stocks and bonds. Investing in real estate can be another effective way to build and easily transfer wealth. Well-maintained properties in high-demand areas can increase in value over time and provide a great deal of equity for homeowners over time.
Develop multiple streams of income
With inflation on the rise, many Americans are looking for extra ways to earn income. Saving and investing for your future self and those that come after you means having enough funds to cover your expenses in the present. A new study by Western and Southern Financial Group found that 44% of U.S. residents are working multiple jobs to build wealth.
Create a legacy strategy
A 2022 survey by Caring.com found that only 33% of Americans have a living will or trust, and one in three Americans who have no will or living trust claim they don’t have enough assets to leave behind. But focusing on the short term could cost you and your loved ones down the line. Regardless of what you have now or what you think the future holds, having documents in place that ensure a smooth transfer of whatever assets you do leave behind protects the wealth you’ve built and gives the next generation a foundation to start from.
“The most important thing to do when you are building generational wealth is to surround yourself with a team that will help you accomplish your objectives,” says Carcone. “Your team should include not only your estate planning attorney, but your tax adviser and your financial adviser.”
These experts can help you create a trust for your beneficiaries that clearly outlines how your wealth should be distributed and invested, and who will be entrusted with your assets. “These are all pitfalls that can get in the way of your legacy lasting for generations, and so you will want to carefully think about who you name as a trustee of your trust, and the terms of distribution. If you are concerned that your child may not have the skill set to invest wisely, for example, you can name a professional to take that responsibility off their shoulders,” says Carcone.
