Wednesday, July 23, 2008

Survival of Wealth Across Generations

Many people include inherited money in their plans for retirement. In my limited experience, the amounts inherited are often much smaller than people expect. But, when great wealth is concentrated in one family, what stops that family from staying wealthy for many generations to come?

Here are a couple of explanations I’ve heard:

1. When people inherit money without having to work for it, they waste it all.
2. A person may create enormous wealth in business, but the next generation may have little business skill, and they will run the business into the ground.

I’ve never heard what I think is the most powerful explanation: when population levels are stable, the average couple has two children, and the family fortune gets cut in half each generation. So, a family may start with enormous wealth, but 5 generations later, 32 families are sharing this wealth.

So, this gives a partial explanation why you will likely inherit less money than you expect. Don’t count on the lottery either. Most people will have to save money for themselves.

4 comments:

  1. The question being,

    "Do you value money?" and "How do you value money?".

    If you didn't have to work to get the money, do you value it? If you can't see the long hours worked to get that money, can you comprehend blowing it on an iPOD Touch? Have you had to decide, "Do I buy coffees at work this week or buy groceries?".

    Those are some of the questions.

    --C8j

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  2. I'm not exactly sure how estate taxes work (in places like the US) but in addition to the dilution over generations you point out, if a portion of the inheritance is lost to taxes in every generation, a fortune can dwindle pretty fast.

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  3. On the other hand, a generation - 20-30 years? - is more than enough time to double the amount of money with ordinary investments (depending on how much is used up of course). But few people really plan their finances for 100-500 years.

    This is something that interests me - a lot of finance bloggers talk about investments that could leave them with much more money than they need in their lifetime, but they don't really talk about how to invest it and manage the spending to help their family. The "unearned money" effect has to be a big concern but there's not much discussion about how to fight it.

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  4. CC: That's a good point about estate tax, or "death tax" as some call it.

    Richard: A generation should be long enough to double an inheritance, and a few will do it, but most won't. I'm afraid that I don't have any great insight into how to stop people from being wasteful with unearned money. I've tried to teach my sons by having them earn their own money. This seems to be a lesson, like many, that has to be learned the hard way.

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