You may have heard about generational wealth, and it kickstarted your imagination of creating a wealth machine so large that generations of your family live a financially secure life. But how do you create generational wealth? Does it require you to build a real estate empire? What are some other methods for creating generational wealth?
What is Generational Wealth?
Generational wealth is accumulated wealth through inheritance, savings, and income from investments or business ventures.
It can be a combination of financial resources passed by family members or other entities, such as trusts, corporations, or foundations.
Generational wealth also includes stocks, bonds, real estate, and other forms of asset ownership that are transferred through marriage, divorce, or death.
Why is Generational Wealth Important?
There are several reasons why people build generational wealth. They include:
- To provide for their children’s future: Children should not have to work long hours to survive; instead, parents or guardians should be willing to invest time and money into them financially so they will never have to worry about their next meal will come from.
- Provide a legacy for your loved ones: If you do not pass on any assets to your heirs, it might cause complications if someone inherits all the assets instead of those initially planned. Having an inheritance plan ahead of time makes this process easier.
- Create a safety net for yourself when old age sets in: Although some people may become wealthy during their younger years, most must rely on our incomes to sustain themselves throughout life.
- Reduce taxes: You no longer pay taxes on funds inherited from relatives when you die. This means that your family is less burdened by paying taxes on those funds.
- Help support charities: Charitable organizations help make the world better for everyone. But these groups could only exist if there was enough money to fund them. Those who leave assets behind can help many more people than just those whose name appears in a will.
- Help reduce poverty rates: Studies indicate that wealthier countries produce fewer violent crimes because they have higher household levels of education, which leads to lower poverty rates. People below the poverty line could not afford books or computers if they had to cover their monthly budget on necessities like food and shelter. The same applies to those who earn $10,000 per year. They would struggle to save money to get out of debt each month.
How Do I Build Generation Wealth?
To begin building generational wealth, start with the basics first. Make sure your finances are in good shape. Take care of your debt payments and save regularly. Once you do those things, then focus on the following steps. They include:
- Start Now: This means investing now to receive later benefits. Investing early gives you the advantage of time. Plus, waiting until retirement to invest could cost you hundreds of thousands of dollars in taxes and penalties due to the tax laws.
- Save Early & Often: The earlier you start saving, the better off you’ll be after retirement. And the more frequently you save, the higher your returns. It is recommended that you contribute 10% of your salary towards retirement savings.
- Maximize Social Security: When you reach full retirement age (age 66), you can increase your monthly social security benefit by 36%. In addition, you could also change your beneficiary designation to maximize your social security payout. For example, if you named one child as the primary beneficiary, switching to another adult would make them eligible for additional funds. Also, you can give your spouse half of what you earn for your lifetime.
- Be Mindful of Taxes: You need to know how much deductions go toward state income taxes in the U.S., which varies by locality. There are no federal taxes deducted anymore. You also pay federal taxes on earnings and investment interests for capital gains, dividends, and interest.
- Work Harder Than Everyone Else: Most experts agree that there is less than 1⁄4 chance of becoming extremely rich. So, don’t expect to get rich without putting in hard work. Instead, find ways to generate income and take advantage of every opportunity that arises.
- Keep Learning New Things: If you want to continue growing after retirement, you need to learn new skills and take courses, especially if you have a career.
- Don’t Get Too Risky: Even though opportunities are limited, many retirees owe $500,000 or millions. Avoid risky investments like real estate development and collectibles like art and wine.
- Have Money Put Away for Emergencies: Have at least three months’ worth of basic living expenses saved if anything goes wrong. Consider having several weeks of living expenses aside to have enough cash if you lose your job.
- Stay Healthy: No matter how old we are, staying healthy is always important. Maintain a well-balanced diet, exercise regularly, reduce stress and avoid smoking.
- Manage Your Health Care Costs: A retiree has access to health insurance through Medicare, but these plans may not be affordable compared to their current costs. As a result, it is wise to enroll in an employer plan before retiring. Otherwise, you could find yourself receiving inadequate coverage or paying high premiums.
- Invest in Lowcost Index Funds: Most families with generational wealth have stock market investments. This is because public companies are designed to make money in the long run. The stock market provides liquidity and solid assets to borrow against without selling the underlying asset.
- Become a Real Estate Investor: Many individuals on the Forbes billionaire list have a substantial real estate portfolio. This is because the real estate market provides many benefits to its investors. If utilized correctly, it can be a stable store of value, feed your family with tax benefits, and provide substantial cash flow.
- Focus On Quality Of Life: While money matters greatly, most people worry about their bank accounts too much. Instead, focus on maintaining the quality of life. Look into where you live and whether it meets your needs. Decide how long you wish to stay where you are and what kind of lifestyle feels suitable for you. Then, work from there.
How to Pass on Generational Wealth?
Generational wealth is passed through the following ways:
- Write a Will: You can pass down generational wealth by writing out your wishes in a will. Will typically include instructions for the division of assets among family members. Some states require wills, while others do not. However, the death of a spouse or other close relative triggers the need to write a will. This applies regardless of whether you own property.
- Set Up a Trust: You can also pass along generational wealth through trusts. These trusts hold assets until they are distributed according to a beneficiary’s wishes. With proper planning, trusts can help ensure the distribution of generation wealth.
If you own property, name beneficiaries within your trust documents; otherwise, someone other than the intended recipients could receive the inheritance. Be very careful whom you designate as trustees and co-trustees. The powers and duties of the trustee should be spelled out. It is sometimes beneficial to appoint a professional lawyer to serve as the trustee and attorney for the estate.
- Name Account Beneficiaries: You can name individuals as account beneficiaries if you want to pass on generational wealth without creating a trust. For example, let’s say you want your grandchildren to inherit some of your estates. You would give them shares of stock you hold in your brokerage account. They would use this stock to buy securities with proceeds from the sale of those stocks. When distributing the proceeds of sales or dividends earned, they would pay taxes as required.
- Establish Retirement Accounts: Once you reach retirement age, you can set up Individual Retirement Accounts (IRAs). You can also establish pension plans, 401(k) plans, or other savings and investment vehicles for future generations.
- Create Charitable Gifts: Since you cannot control when you die, you can now prepare charitable gifts and save them after you have passed away.
What are the Challenges of Building Generational Wealth?
The challenges facing building generational wealth include:
- High Taxes: Most government agencies tax income at different rates depending upon the amount received. As the amount of generational wealth increases, so does the tax burden. In addition, higher taxes may apply to capital gains, which arise when an asset appreciates.
- Uncertainty Over Family Values: Often, people want to leave their children substantial amounts of cash because they feel it will “settle them down” when they inevitably become parents themselves. But having lots of money doesn’t necessarily mean you will instill good values in your children. Many young people today struggle financially because they ignore traditional standards of success and education. Therefore, you may pass along less than you hoped rather than more.
- Changing Life Expectations: People often wish to avoid leaving large sums of money to their kids. Instead, they prefer to spend the money during their lifetimes. As a result, many people go significantly smaller amounts to their children than they had planned. However, if you don’t plan, there is no guarantee that your children will leave anything significant to you. You must ensure that you provide enough money to sustain yourself and your spouse until your children mature enough to take care of themselves.
It is important to remember that once you have built a significant amount of financial wealth, your lifetime decisions become increasingly difficult. Therefore, before making your financial legacy, you should consider all available options. For instance, you may decide to create a will or a trust, but if you choose not to, it does not mean that you cannot still leave a lasting impression on your loved ones.
Tyler is a real estate investor. He has flipped over 50 homes and manages a real estate portfolio in the midwest. He strives to help others build wealth and add value to other’s lives through a constant pursuit of growth.