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Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)

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Re: Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)

#21

Post by harimau777 »

jonathan_landy wrote: post #5
jarsin wrote: post #3

I love how all these articles assume families are functional and they all act in the best interest of each other.

I submitted it because I saw a comment somewhere else about the rich being locked into unfair advantages and classes ossifying. Seems to not be true if these stats are to be believed.

It could also be interpreted as demonstrating the advantages that the rich have:

Even those families who somehow manage to build up wealth likely to lose it within two generations. Meanwhile the ultra-wealthy are able to continue being ultra-wealthy from one generation to the next regardless of how competent that generation is.

Re: Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)

#22

Post by creer »

bamboozled wrote: post #18
dirtdobber wrote: post #14

I feel like this is almost always due to education around modern money systems. If a child inherits $1 million from their parents (after taxes), they may feel rich, and they may try really hard to hold onto that money by saving and buying appreciating assets. In 10 years time that money might grow to $2 million. However, the buying power of $2 million is approximately equal to $1.5 million (3% inflation over 10 years…

What should they do ?

There are two ways, I feel.

1. Spend it. In some cases that might be a fair direction. It's easy to spend 1 million. It's very hard to spend 1 billion though.

2. Seriously learn about money and investing. Really it's not impossible! But of course it's a field full of hype, hype vendors, counter-intuitive ideas, non-obvious ideas, "math" - some simple some seriously not, and nowadays very counter-narrative directions, etc... So that new fantastic books are still being written on the subject (by people who actually know what they are doing, as opposed to banking on a potential best seller.) Basically, that becomes a serious endeavor - which few people are ready for.

Re: Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)

#23

Post by Ekaros »

harimau777 wrote: post #21
jonathan_landy wrote: post #5

Earlier quoted context omitted.

I submitted it because I saw a comment somewhere else about the rich being locked into unfair advantages and classes ossifying. Seems to not be true if these stats are to be believed.

It could also be interpreted as demonstrating the advantages that the rich have: Even those families who somehow manage to build up wealth likely to lose it within two generations. Meanwhile the ultra-wealthy are able to continue being ultra-wealthy from one generation to the next regardless of how competent that generation is.

1% of 1 billion is 10 million. That is lot of money to spend on consumption. And in many cases such consumption doesn't necessarily entirely destroy spend money. Think of classic cars or art or real estate...

Only real way to destroy such amount of money is something stupid like starting an airline...

The ultra-wealthy territory is one were actually losing becomes hard, if you have even some moderation in actions.

Re: Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)

#24

Post by creer »

cushpush wrote: post #4

Another aspect: savings and investment habits. If you are born rich and have savings and investment habits that are good, you will remain rich. Savings and Investment habits are a large determinant. The article suggests that the prior generations' "worry about entitled behavior" is the second dominant cause, while financial illiteracy trailing behind at third (in order of presentation). But I find that quite misleadi…

It takes time and serious work to learn about investing beyond clichés. Past even the basic professional level which is entirely "mechanical" - grounded in practices, not in understanding. Meanwhile if one heir is headed to med school and the other is going from vacation to harebrained scheme, what are you - the patriarch - going to do? Neither has time or inclination to learn seriously.

Re: Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)

#26

Post by creer »

jonathan_landy wrote: post #5
jarsin wrote: post #3

I love how all these articles assume families are functional and they all act in the best interest of each other.

I submitted it because I saw a comment somewhere else about the rich being locked into unfair advantages and classes ossifying. Seems to not be true if these stats are to be believed.

Exactly. "The rich" as a narrative is everywhere. While in financial terms, it is not all that difficult to keep wealth growing. To the point that in a hundred years - not all that long - any "new wealth" should turn into a truly massive pile. But there aren't, or very few. On the contrary, the top of the Forbes list is mostly new wealth.

Re: Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)

#27

Post by creer »

sidewndr46 wrote: post #12

can't this be summed up as lots of countries have laws (or historically had) against establishing perpetual trusts? It'd be trivial for someone like Gates to set up a trust that pays out to all his heirs indefinitely without them being able to directly extract the assets of the trust. If it were legal.

I don't think so. Doubling money in 10 years, on average, is nothing extraordinary. It's a little sub-par. Far more in some 10 years, less in others, sure. But doubling in 10 years.

So even a 50% inheritance tax, erm, "haircut", should be recovered in 10 years and clearly beaten after that by the next generation.

IF that was the only issue. It's not the only issue.

Re: Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)

#28

Post by dirtdobber »

bamboozled wrote: post #18
dirtdobber wrote: post #14

I feel like this is almost always due to education around modern money systems. If a child inherits $1 million from their parents (after taxes), they may feel rich, and they may try really hard to hold onto that money by saving and buying appreciating assets. In 10 years time that money might grow to $2 million. However, the buying power of $2 million is approximately equal to $1.5 million (3% inflation over 10 years…

What should they do ?

Spend no more than 1% of their investment per year and invest the rest. This means that if you inherit $10m (after taxes), you should really only be withdrawing about 100K (before taxes). On the remaining wealth, you hope to earn 7+% year over year to beat inflation and grow your *real* net worth over time.

Inflation is necessary, and a low, predictable inflation rate is good for the economy. But it's still a wealth tax of the worst kind -- it's essentially a flat tax on everyone regardless of their level of wealth.

Remember, a government with $35T in debt can't possibly raise that much money from taxes; 3 out of every 4 dollars we pay in income taxes already goes to interest payments on that debt alone. The government will instead inflate the debt away by paying it back with future dollars that are worth less.

Many high net worth individuals are aware of this fact, but blindly giving heirs millions of dollars and not educating them about the money system will inevitably lead to poor outcomes.

Re: Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)

#29

Post by blitzar »

dirtdobber wrote: post #14

I feel like this is almost always due to education around modern money systems. If a child inherits $1 million from their parents (after taxes), they may feel rich, and they may try really hard to hold onto that money by saving and buying appreciating assets. In 10 years time that money might grow to $2 million. However, the buying power of $2 million is approximately equal to $1.5 million (3% inflation over 10 years…

> If a child inherits $1 million from their parents (after taxes)

Average life span of the parent is 76. Average age for the parent to have had a child 25.

The "child" inherits $1 million at the age of 51. At that stage behaviours are pretty well established.

Re: Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)

#30

Post by dirtdobber »

blitzar wrote: post #29
dirtdobber wrote: post #14

I feel like this is almost always due to education around modern money systems. If a child inherits $1 million from their parents (after taxes), they may feel rich, and they may try really hard to hold onto that money by saving and buying appreciating assets. In 10 years time that money might grow to $2 million. However, the buying power of $2 million is approximately equal to $1.5 million (3% inflation over 10 years…

> If a child inherits $1 million from their parents (after taxes) Average life span of the parent is 76. Average age for the parent to have had a child 25. The "child" inherits $1 million at the age of 51. At that stage behaviours are pretty well established.

While this is true for many, it's worth noting that there's a growing trend of "giving while living" (especially for UHNWI and HNWI in the US).

This means that heirs of wealthy families are receiving portions of their inheritance often in their late 20s/early 30s.

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