Generational wealth is a tangible legacy that ensures your efforts and success will benefit your posterity. In a country where most people aren’t able to fund their own retirements, it’s a worthy aspiration that’s often out of reach–but it doesn’t have to be.
“Being able to transfer generational wealth means you incorporated legacy into your financial plan because you wanted to leave your heirs with something meaningful,” said Retirement Income Certified Professional David Globke, vice president of SFA Wealth Management in Murfreesboro, Tennessee.
“Creating generational wealth doesn’t just happen,” added Globke. “It involves careful planning and intention. A proactive financial plan can help you work toward your legacy goals by lowering your tax liability and maximizing your assets.”
Here’s what to do–and what not to do–to improve your chances of building wealth that endures through generations.
Invest in Life Insurance
A good life insurance policy is the most direct and least labor-intensive way to ensure your heirs receive a windfall upon your death.
“Many people think about buying life insurance to protect their family, but it’s also a powerful tool for creating generational wealth,” said Globke. “Insurance payouts are often tax-free and can be accessed quickly after you pass away.”
Max Out Your Retirement Accounts
Tax-advantaged retirement accounts–particularly 401(k)s with employer matches–are the keys to building a nest egg that outlives you. The government limits how much you can contribute to them. Try to meet those limits every year you can.
“One of the most effective ways to build wealth is to make the maximum contribution to your retirement accounts each year, which will help build a solid financial foundation,” said Christopher Stroup, a certified financial planner with Abacus Wealth Partners in Santa Monica, California. “This money grows tax-deferred for several decades and is either tax-free upon future distributions or offers a tax deduction when you make the contribution.”
Don’t Forget to Account for Inflation
Your dollars continuously lose value during the decades it takes to build, protect and plan to pass on wealth– invest in a way that addresses that reality.
“You give yourself the best chance of creating generational wealth by establishing a portfolio that will outpace inflation,” said Stroup. “Diversifying your investments across stocks, real estate and other assets that offer higher expected returns will help you build wealth that will last several generations.”
Invest Early, Often and Wisely
Time is every investor’s most powerful tool. If you start early and invest consistently, you don’t have to be wealthy to grow a fortune that outlives you.
“Time and compound growth are powerful allies when building generational wealth,” said Fluent in Finance founder Andrew Lokenauth, a 15-year Wall Street veteran who held leadership positions at JP Morgan, Goldman Sachs and Citi. “Start saving and investing as soon as possible.”
Another key is to prioritize assets that gain value with time. “Focus on accumulating appreciating assets like stocks, real estate and businesses rather than depreciating assets like cars and electronics,” said Lokenauth.
Finally, maintain a long-term mindset and avoid trying to time the market or making emotion-based decisions. “Don’t panic during market dips and down cycles,” said Lokenauth. “Stay invested with a time horizon of decades.”
There’s no sense in building wealth without a plan in place for successfully transferring it to your heirs according to your wishes.
“An estate plan is a critical piece to successfully passing wealth from one generation to the next,” said Stroup. “By planning your estate appropriately, you can take steps toward minimizing estate taxes while incorporating control mechanisms that govern how the money can be used.”
Without an estate plan, the courts will distribute your assets, and your heirs– and hangers-on looking for a quick buck–could wind up squabbling over them in court.
Teach Your Heirs Financial Literacy
Even the best-laid estate plans can’t prepare heirs who are not equipped to manage the money they inherit. Make financial literacy part of your household conversation–and start early.
“Spend time with your children to teach them money concepts,” said Stroup. “There are books and courses for children of all ages. These lessons can help them maintain and grow the wealth that you hope to pass down to future generations.”
Wills must pass through the long and potentially expensive legal process of probate. Trusts do not go through this process, and unlike wills, trusts are not part of the public record. Avoiding probate and safeguarding privacy are the two primary benefits of trusts, but they also offer a far more granular level of control over how your assets are distributed.
“A trust can help you create boundaries and give you more control over how your wealth is transferred,” said Globke. “For example, a spendthrift trust can release a certain amount of money to your heirs when they turn 18, 25 and 30. This can encourage your beneficiaries to use the money wisely rather than spending it all at once.”
Contemplate How an Inheritance Will Impact Your Heirs
It’s also important to consider your heirs’ unique situations and personalities when estate planning.
“Providing generational wealth can set your heirs up for financial success, so long as it is passed along in an efficient manner,” said Globke. “You want to transfer your wealth without creating discord in the family or dropping a tax bomb. Carefully consider the types of accounts you’re leaving to your heirs.”
“For example, if your children have done well for themselves and already have a high income, inheriting a 401(k) with taxable distributions could be a financial headache for them,” Globke continued. “When setting up a legacy for your heirs, consider the amount of money they can reasonably handle and what they actually need.
Warren Buffett once said he would leave his kids ‘enough money so that they would feel they could do anything, but not so much that they could do nothing.’ Finding that sweet spot for your family can help your heirs feel truly grateful for the gifts you leave while also helping avoid family divisions.”
Want To Be Really Rich? Build a Business
John Jennings is the president and chief strategist of the St. Louis Trust & Family Office, a $15 billion wealth management firm, and an adjunct professor at Washington University’s Olin Business School in St. Louis, Missouri. In his experience, there’s usually just one true path to real wealth.
“With rare exceptions, if you want to generate significant wealth, you must be actively involved in a successful business,” he said. “High-income earners like doctors and lawyers make a nice living, but people who vault into tens of millions of dollars or more of wealth are business owners with remarkably similar strategies. They:
- Concentrate their assets, usually in a single company. This increases the chances of winning big if their one big bet pays off.
- Tolerate a high level of risk. Their success or failure depends on their company. If it takes off, they are rich. If it flounders or fails, they aren’t.
- Are obsessed. They invest almost all their time and talent in their business. Building the company is their singular focus and takes over much of their lives.
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