Intergenerational wealth – just for dynasties?
When thinking of intergenerational wealth, what often comes to mind are images of famous dynasties that have managed to accumulate massive family fortunes over multiple generations. However, building intergenerational wealth is far less glamorous and a lot more attainable, or at least it should be.
Every person needs to have a plan for accumulating enough savings to provide for their retirement. Ultimately, the goal is to accumulate enough to ensure you don’t outlive your savings. By implication, there should be something left for your beneficiaries after you’re gone – that is the definition of building intergenerational wealth.
So, if building intergenerational wealth is that simple, why do we have so few dynasties? Well, while it sounds simple, it is not always easy. Here are some of the challenges you will face from pre- to post-retirement.
There are three key variables in the wealth equation – returns, contributions, and time. An investor’s success in pre-retirement will largely be determined by how well they have addressed these three variables. Did you invest wisely, not compromising your own return outcomes by buying high and selling low? Studies show that most investors fail at this. Secondly, did you only rely on investment returns, or did you make regular contributions? Lastly, did you start saving early enough, or did you delay?
Building wealth in pre-retirement requires that you invest wisely, regularly, and with great discipline. It will come at the expense of other things, such as that new pair of designer shoes, a new car, or an overseas holiday. You will need to sacrifice your wants of today to better meet your needs in the future.
While pre-retirement is all about building wealth, post-retirement is more about protecting the real value of your wealth. Here there are two key aspects: firstly, do not draw too much income, and secondly, ensure that you’re comfortable with the trajectory your capital is taking after the effects of withdrawals and inflation have been considered.
It is not unusual to see capital decline as investors start to live off their wealth but, ideally, you want to live off your gains in excess of inflation and protect the real value of your savings. This means you could be able to sustain your current spending into perpetuity.
The reality, however, is that very few investors accumulate an amount of wealth that will be able to achieve this. In most cases, investors need to draw into their savings beyond the growth to sustain a living. If that is the case, the risk of outliving capital becomes a reality. But if you do your planning correctly, monitor your progress regularly, and adopt the advice that is provided by your financial planner, your chances of having sufficient capital are possible, though sacrifices may need to be made.
If accumulating and protecting wealth in pre- and post-retirement wasn’t difficult enough, the challenge follows you into the grave. Too often, investors obsess about investment returns, monitoring every daily move in the markets, and yet the importance of solid estate planning is neglected. This may be one of the most expensive mistakes an investor can make. Having a will and an estate plan that serves as an efficient roadmap for implementing the wishes of the deceased is critical.
Building intergenerational wealth is quite literally a challenge that lasts a lifetime. Every person needs to have a plan for accumulating savings, but equally important is what happens during retirement, and after death.