The more money your family accumulates, the more complex it can become to decide how much to invest, what to buy, which strategies to apply, what to bequeath, and how to minimize transfer taxes. The number of beneficiaries for your family’s assets may also increase as your wealth grows. As a result, there are likely to be emotional issues to take into consideration since inheritance can be a sensitive subject even for close families.
Additional complexity shouldn’t deter you from wanting to grow your wealth. Putting together a plan to create multi-generational wealth through investing can be an exciting and rewarding exercise that can provide a lot of peace of mind for you and your loved ones.
A Massive Generational Wealth Transfer Is Coming
You’ve likely already heard that a sizeable number of assets are changing hands between the baby boomer generation and their adult children. It’s estimated that nearly 94 million American estates could transfer approximately $59 trillion between 2007 and 2061 according to a study by the Center on Wealth and Philanthropy at Boston College.
Have you talked to your parents about their assets lately? The average American inheritance is $177,000. Perhaps you might be a recipient to funds waiting in the sidelines. In any case, it’s a good idea to start taking control of your own finances, get more proactive with investing, and strive to create multi-generational wealth of your own for years to come.
Work On A Putting Together A Comprehensive Wealth Plan
If you want to have a comfortable retirement and also leave a legacy for your family, it’s a good idea to put together a comprehensive wealth plan while you’re young. You want to have the best chance to make the most of your investments and also minimize taxes.
Here are some steps you can take to develop your own comprehensive wealth plan.
Identify the areas of your personal, family and business life that currently have an impact on your finances or could in the future.
- Take the time to understand what types of investment fees you are currently paying in your accounts. Don’t underestimate fees because they can really add up over time.
- Envision your future, specifically your aspirations, fears, challenges, strengths, weaknesses, and lifetime goals. Work on improving your health now so you can stay active for many more years to come.
- Ask yourself questions like, how much money do I want to accumulate by certain ages? How many assets would I like to be able to pass down to my beneficiaries? Which charities are the most meaningful to me and how can I support them? How much flexibility do I want to retain if I want to change course with my wealth plan later on?
- Determine the best way to structure your estate with the help of a tax advisor or estate planner. There are various options you can explore such as trusts, endowments, foundations, giving during life versus at death, and setting up incentives or restrictions your heirs must meet before they can acquire certain assets.
- If you haven’t already, consider purchasing life insurance. Even if you have coverage from your employer, you may want to purchase a supplemental term life insurance policy. No one likes to think about death, but life insurance can provide peace of mind that your dependents will be well taken care of without you.
- If you are a business owner, analyze if a legal restructuring could provide added tax benefits. Also think about a business succession plan and talk to your family about if and how they want to be involved.
- Build an investment portfolio that meets your risk strategy and time horizon. Consider combining various asset classes, investment strategies and a range of geographic exposure. Also take your lifestyle and liquidity requirements into consideration when constructing your investment portfolios.
- Calculate how much money you anticipate needing in retirement. Analyze your age, health, location, lifestyle, spending habits, dependents and other factors that could influence how much money you may need to live comfortably. Don’t let your spending habits cause you to have a retirement shortfall. Aim to keep your spending rate below 4 percent to have a low probability of running out of money.
- Come up with a monetary target of what you would like to bequeath to your loved ones. Having a specific goal can help keep you motivated and stay on track to reach your target on time.
- Set reminders to regularly check in on the progress of your wealth goals every three to six months. If you experience significant lifestyle or financial changes, you may need to make adjustments to your wealth plan to avoid getting steered off course.
Adjust Your Investment Strategy As You Age
It’s natural to have the urge to take more risks in your career and lifestyle during your 20s and 30s. As you get older and your number of dependents and assets increase, you are likely to become more conservative in your decision-making – like going from driving a sports coupe to a safer sedan.
Taking a similar approach to your investments is often suggested as you age. The more money you grow in your investment accounts, the more conservative you are likely to become in order to protect everything you’ve earned over the years.
Consider reducing your exposure to illiquid high-risk investments and highly volatile securities over time. Increasing your asset allocation to bonds while lowering exposure to stocks is a common approach. Traditionally, many advisors suggested applying the rule “100 minus your age” to figure out what percentage to hold in stocks over time. Due to increasing life expectancies, this rule of thumb has been modified to “120 minus your age.”
Identify Your Core Capital Needs And Pay Yourself First
You may wish to give everything you have to your heirs, but don’t forget about paying yourself first. Identify your core capital needs, which includes the amount of money you realistically anticipate needing to maintain your lifestyle and live comfortably for the rest of your life. You should also plan to have a personal reserve for life’s unexpected expenses.
Estimating your core capital needs can help you determine how much money to retain in your estate. You may wish to keep these monies in conservative investments that are fairly liquid.
The remainder or excess capital that you build can be designated to your children, grandchildren, and charitable organizations. Depending on the risk profile, time horizon, characteristics and needs of your desired beneficiaries, you may choose to use a higher risk investment strategy with your excess capital.
Only you can decide how much inheritance is too much for your loved ones. You know them better than any financial advisor after all. The more you and your family prepare for an inheritance, the less worries you’ll have as you get older as well.
One way to encourage your family to follow your legacy of investing is to start offering family members who are working a matched giving plan. For example, you can match their monthly contributions into a retirement or other investment account. This urges them to save and helps them appreciate your financial support and interest in the markets. Passing along your knowledge of investing can help create multi-generational wealth for decades to come.
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Motif Investing does not provide tax, legal, or estate planning information.
- McMahon, Madeline, Margaret Collins, “Rich Parents Agree: $63 Million Is Too Much Inheritance,” Bloomberg Business, April 30, 2015.
- Ellis, Blake, “Average American inheritance: $177,000,” CNN Money, December 13, 2013.