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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)

#41

Post by blitzar »

dirtdobber wrote: post #30
blitzar wrote: post #29

Earlier quoted context omitted.

> 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.

It's worth noting that there's a growing trend of "spending the kids inheritence" SKI parents - https://nypost.com/2024/07/15/lifestyle/im-spending-all-of-m...

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

#42

Post by kryogen1c »

TFA and other commentors have some points, but I believe it's much simpler than all of the above:

Doing a thing is a different skillset than teaching how to do that thing. Nothing more to it.

If there was a self reinforcing loop where greatness begat greatness, it would be everywhere: every sport, every politician, every martial art, every resource, every industry - for centuries, millenia.

Greatness and teaching greatsness are merely correlated in the best case, and are just as often counterfactual.

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

#43

Post by oezi »

urda wrote: post #6

I'm not completely shocked, and for a lot it does come down to literally greed. My grandparents immigrated to the United States on both sides of the family, and had my father and mother respectfully. They saw their work ethic and worked equally hard, reaching to high levels in their medical fields. They then had a few children including me, and now I'm the only child left "standing" because my sisters turned into cla…

You started with "it does come down to literally greed", but the rest doesn't include what I would consider greediness, namely that many times the parents do not properly pass the wealth down the generations because they want to hold onto it until retirement or death.

Financially it would make most sense to pass money early (invested in ETFs) and ensure that children can step on the property ladder early on, but this requires parents to pass a lot of wealth in their mid-40ies to mid-50ies.

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

#44

Post by PopAlongKid »

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…

> they may try really hard to hold onto that money by saving and buying appreciating assets.[...] their real wealth was only increasing by a modest 30K per year.

Not to mention the initial $1M increase, which you conveniently did not. And that's $30K/year they did not have to work for and that they would not have otherwise, so what's disappointing about that?

You can avoid a lot of needless drama by simply stating that the real rate of return, after inflation, would be about 4%/year.

And your tax argument is weak. Just as the parents left tax-free money to them, they too can leave tax free money to heirs simply by dying. There is no need to pay any capital gains taxes while they are still alive, if they simply leave the money invested. Even if they need some of it for expenses, the tax hit is much, much lower if withdrawn in smaller annual amounts than in one giant lump sum after ten years.

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

#45

Post by PopAlongKid »

dirtdobber wrote: post #37
rufus_foreman wrote: post #32

Earlier quoted context omitted.

>> I feel like this is almost always due to education around modern money systems. I don't think it is a matter of education, at least for me it is instinctual. If I get a large amount of money, I am going to invest most of it and it would never occur to me to do otherwise. When I get a paycheck, I am going to invest part of that paycheck first before I spend any of it, and it would never occur to me to do otherwise.…

I have not heard of that poem, thanks for sharing! With respect to education around money systems, I am referring more to (a) knowing that investing is necessary but insufficient and (b) understanding the main drivers (besides spending) of wealth loss: inflation and taxation. It's hard (even for successful, intelligent people) to wrap their head around the fact that their $1m house that ballooned up to $2m over the l…

>It's hard (even for successful, intelligent people) to wrap their head around the fact that their $1m house that ballooned up to $2m over the last 25 years has in fact, lost value.

Anything to back that up? I spent some time searching online and every source strongly disagrees with your assessment of house prices vs. inflation. And the tax argument also fails here, since two people who own a home can exclude half a million realized gain from tax altogether, or leave it entirely tax free to heirs.

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

#46

Post by dirtdobber »

blitzar wrote: post #41
dirtdobber wrote: post #30

Earlier quoted context omitted.

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.

It's worth noting that there's a growing trend of "spending the kids inheritence" SKI parents - https://nypost.com/2024/07/15/lifestyle/im-spending-all-of-m...

Haha oh geez. Some parents are just awful

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

#47

Post by dirtdobber »

PopAlongKid wrote: post #45
dirtdobber wrote: post #37

Earlier quoted context omitted.

I have not heard of that poem, thanks for sharing! With respect to education around money systems, I am referring more to (a) knowing that investing is necessary but insufficient and (b) understanding the main drivers (besides spending) of wealth loss: inflation and taxation. It's hard (even for successful, intelligent people) to wrap their head around the fact that their $1m house that ballooned up to $2m over the l…

>It's hard (even for successful, intelligent people) to wrap their head around the fact that their $1m house that ballooned up to $2m over the last 25 years has in fact, lost value. Anything to back that up? I spent some time searching online and every source strongly disagrees with your assessment of house prices vs. inflation. And the tax argument also fails here, since two people who own a home can exclude half a…

Not saying a home isn't a good investment. But on average, home prices have risen 4% y.o.y. in the US. Inflation target is 2% but is much closer to 4%. If you sell your house for $1m more than you bought it for, you can exclude 500K from capital gains, but you're still paying cap gains on the other 500K.

Bottom line: assume a 1% real profit y.o.y. on your home, then factor in closing costs (8%), and. then cap. gains on the profit. You didn't make as much as you think.

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

#48

Post by dirtdobber »

PopAlongKid wrote: post #44
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…

> they may try really hard to hold onto that money by saving and buying appreciating assets.[...] their real wealth was only increasing by a modest 30K per year. Not to mention the initial $1M increase, which you conveniently did not. And that's $30K/year they did not have to work for and that they would not have otherwise, so what's disappointing about that? You can avoid a lot of needless drama by simply stating th…

I don't understand your argument? You seem to be implying that if heirs don't withdraw any money then they will stay rich? Yes.

The point I was making is that most heirs might not fully understand tax implications, inflation, and that increases in nominal wealth != increases in real wealth. This all leads to generational wealth dying out, as well as for reasons mentioned by others in the thread.

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

#49

Post by CraigRo »

Shirt sleeves to shirt sleeves in three generations. I’ve heard this since I was young; this is hardly new.

Inherited wealth does not encourage frugality, nor does the third generation generally find working hard to be as fulfilling as the first did. You see a lot of artists and lifestyle businesses in the third generation coupled with a fairly plush lifestyle

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

#50

Post by horns4lyfe »

creer wrote: post #22
bamboozled wrote: post #18

Earlier quoted context omitted.

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,…

A truly impressive non-answer.
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