Wealth is a finite resource, and it typically only lasts three generations due to the lack of financial literacy that is passed down from generation to generation. Without proper knowledge of money management, investments, taxes, and other aspects of personal finance, families tend to deplete their wealth over time.
But, despite the many benefits of generational wealth, it also has its downsides. Generational wealth can ruin the motivation of your future heirs, create conflicts within your family, and perpetuate existing inequalities.
Challenges of building generational wealth
Unfortunately, the default for parents is to work hard and pass down assets. But that scenario is unlikely to work in most cases. That's why an estimated 70% of generational wealth doesn't make it past the second generation, and 90% disappears by the third.
Generational wealth refers to the assets and wealth that are passed down from one generation to another, including cash, real estate, stocks, businesses, and other investments. This type of wealth provides long-term financial stability and security for future generations.
Building lasting wealth involves creating a plan for how it will be transferred and passed down to the next generation. This is known as generational wealth. Figures from Gobankingrates show that 70% of wealthy families lose their wealth by the next generation, with 90% losing it the generation after that.
Among the causes of the phenomenon are taxes, inflation, bad investment decisions and the natural dilution of assets as they are shared among generations of heirs. Yet among the most compelling causes are younger family members who are ill-prepared or unwilling to shoulder the responsibility of wealth stewardship.
The “third generation curse” indicates that 90% of wealthy families are likely to lose their money by the third generation, according to AMG National. Fortunately, you can beat the so-called “third generation” curse through financial education, money management and hiring the right professionals to help.
Children of wealthy parents are more likely to be successful than children of poor parents. This is not only because they have more financial resources but also because they have access to better education, health care, housing, and opportunities. Generational wealth provides a similar advantage.
A groundbreaking 20-year study conducted by wealth consultancy, The Williams Group, involved over 3,200 families and found that seven in 10 families tend to lose their fortune by the second generation, while nine in 10 lose it by the third generation. However, there are ways to be at the odds.
Generational Wealth Lasts Forever
A staggering 70 percent of wealthy families lose their wealth by the next generation, with 90 percent losing it the generation after that. Sustaining substantial wealth takes financial savvy–something that not all rich parents are passing along to their heirs.
The third-generation curse is a phenomenon that affects many families, causing them to lose a significant portion of their wealth by the third generation. This alarming trend has led to a growing need for strategies that help families protect and grow their wealth for generations to come.
Dave Ramsey, personal finance expert and founder of Ramsey Solutions, says this myth of primarily inherited riches is “flat wrong.” When Ramsey's National Study of Millionaires asked where the riches came from, they found that a whopping 79% didn't receive any inheritance from parents or other family members.
According to the “third-generation rule,” 70% of affluent families will have lost their wealth by the third generation. This economic adage addressing the longevity of multigenerational wealth has been well studied across cultures and professions.
The wealth effect can work in the opposite direction as well; if an individual's wealth decreases (for example, if the value of their investments or home falls), they may be less likely to spend money and may cut back on their consumption. This can have a negative impact on aggregate demand and economic growth.
Greater income inequality can lead to monopolization of the labor force, resulting in fewer employers requiring fewer workers. Remaining employers can consolidate and take advantage of the relative lack of competition, leading to less consumer choice, market abuses, and relatively higher real prices.
Baby Boomers Hold Half of the Nation's $140 Trillion in Wealth. A chart that shows a breakdown of the 140 trillion dollars in total wealth in the U.S. held by four generations in which the baby boomers who were born in 1946 to 64 have the most, with 78.3 trillion dollars in assets. Pensions $16.1 tril.
Wealthy families can set up multigenerational dynasty trusts
"A dynasty trust typically means a trust that keeps its assets in trust for multiple generations and doesn't distribute assets outright to beneficiaries at a set point," he said.
Building enough wealth that it can last across generations requires consistently living below your means (and saving your excess income). Start by maxing out your retirement accounts, then you can move on to investing in outside brokerage accounts and other assets that might gain value over time.
Their higher net worth is expected: with most baby boomers financially planning for at least a few more decades, they benefit from wealth earned from long careers and have more robust retirement accounts than the silent generation, who have dipped further into retirement savings.
How much money is considered generational wealth? For any amount of wealth to be considered generational wealth, it simply has to be passed down by at least one generation; however, there is no definitive number that constitutes generational wealth because wealth is relative.
In short, old money represents generational wealth — money that has been passed on from generation to generation in the form of cash, investments, and property. New money refers to self-made millionaires and billionaires, those who earned their money (or lucked into it, like in the lottery).
When people talk about generational wealth, they're typically referring to things of value that are handed down from one generation to the next. These assets might include everything from cash to real estate, art to investments, even stakes in family businesses.