Why Do 70% of Families Lose Their Wealth in the 2nd Generation? (2018)
nasdaq.comI'm not completely shocked, and for a lot it does come down to literally greed. My grandparents immigrated to the United States on both sides of the family, and had my father and mother respectfully. They saw their work ethic and worked equally hard, reaching to high levels in their medical fields.
They then had a few children including me, and now I'm the only child left "standing" because my sisters turned into classic "Southern Belles" and once the cash flow stopped from the folks they quit coming around. My brother turned to booze and the bottle, thinking partying is the only true answer. It's just depressing that out of the 4 children who had the same education and upbringing, I'm pretty much the only one in the generation that "gets" the concept of finance and money.
My sisters and brother? Literally no work ethic. They are literally proud to scrape by, avoid holding a job, and avoid helping our aging parents. But the sisters demanded the most lavish things and weddings, and the brother expected that my father and I would have infinite resources to keep bailing his ass out of trouble.
It is no surprise that I've maintained a healthy relationship with my parents and family, while they've continued to seek the next quick buck in their lives.
You started with "it does come down to literally greed", but the rest doesn't include what I would consider greediness, namely that many times the parents do not properly pass the wealth down the generations because they want to hold onto it until retirement or death.
Financially it would make most sense to pass money early (invested in ETFs) and ensure that children can step on the property ladder early on, but this requires parents to pass a lot of wealth in their mid-40ies to mid-50ies.
A few more bullet points on the pile that aren't as often discussed, probably because they don't fit grand moralistic/child-rearing narratives:
* Regression to the mean. [0] Humans try very hard to avoid "dumb-luck" in any story even if it's the best available explanation.
* Inheritance split to more than one heir.
For the heir-scenario, imagine that Generation 1 is a single family living off the interest of $12m. They have three kids, who marry equivalently-wealthy spouses. Now Generation 2's average wealth is $8m. That's a decrease, and we haven't even begun to talk about factors like "raised with good habits" or "work" etc.
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[0] https://en.m.wikipedia.org/wiki/Regression_toward_the_mean
To digress a little on the "dumb luck" stuff... Human brains seek patterns and create stories and "find" cause and effect, and that's been extremely useful for us overall... But there are also risks and blind spots.
My favorite example is the humble coin toss. Yet many people joyfully fall into faux-explanations of "hot streaks" or "overdue" outcomes etc., and retain them no matter what statistical evidence you provide.
Even those who consciously reject those ideas still have to bat the intrusive thoughts away, and that's for one of the most well-studied statistically characterizable things out there.
I feel like this is almost always due to education around modern money systems.
If a child inherits $1 million from their parents (after taxes), they may feel rich, and they may try really hard to hold onto that money by saving and buying appreciating assets. In 10 years time that money might grow to $2 million. However, the buying power of $2 million is approximately equal to $1.5 million (3% inflation over 10 years). Couple that with a 20% tax on capital gains, and their real wealth increased by only 300K over 10 years after inflation. So while their nominal wealth seems to have doubled, their real wealth was only increasing by a modest 30K per year.
And this is all assuming that the person isn't spending any of that money. A different person might spend + invest and still have $1 million in their bank 10 years later... But this isn't the same $1 million they had 10 years ago --- adjusted for inflation they are 250K more poor
> If a child inherits $1 million from their parents (after taxes)
Average life span of the parent is 76. Average age for the parent to have had a child 25.
The "child" inherits $1 million at the age of 51. At that stage behaviours are pretty well established.
While this is true for many, it's worth noting that there's a growing trend of "giving while living" (especially for UHNWI and HNWI in the US).
This means that heirs of wealthy families are receiving portions of their inheritance often in their late 20s/early 30s.
It's worth noting that there's a growing trend of "spending the kids inheritence" SKI parents - https://nypost.com/2024/07/15/lifestyle/im-spending-all-of-m...
Haha oh geez. Some parents are just awful
>> I feel like this is almost always due to education around modern money systems.
I don't think it is a matter of education, at least for me it is instinctual. If I get a large amount of money, I am going to invest most of it and it would never occur to me to do otherwise. When I get a paycheck, I am going to invest part of that paycheck first before I spend any of it, and it would never occur to me to do otherwise. I did that when I was making minimum wage.
This wasn't taught, my parents did not do that and my siblings do not do that. I don't think it is inherited. The collector gene is, my father and grandfather had that gene and I think it is related, but the investor trait is something additional. I don't know where I came up with that. It has made things in my life hard in the short run sometimes and very easy in the long run.
You can educate people all you want, but when they get money, most of them are going to decide well I need this and I need that so I can't save any money this time. Maybe next paycheck. That's what my family did, my friends, my girlfriends.
There's a Bukowski poem he wrote about his father's investment advice:
"I can pay for this house in my lifetime,
then it's mine.
when I die I pass it on to you.
now in your lifetime you can acquire a house
and then you'll have two houses
and you'll pass those two houses on to your
son, and in his lifetime he acquires a house,
then when he dies, his son -
I get it, I said."
What did he do?
"I gambled and drank away the money."
I have not heard of that poem, thanks for sharing!
With respect to education around money systems, I am referring more to (a) knowing that investing is necessary but insufficient and (b) understanding the main drivers (besides spending) of wealth loss: inflation and taxation.
It's hard (even for successful, intelligent people) to wrap their head around the fact that their $1m house that ballooned up to $2m over the last 25 years has in fact, lost value.
>It's hard (even for successful, intelligent people) to wrap their head around the fact that their $1m house that ballooned up to $2m over the last 25 years has in fact, lost value.
Anything to back that up? I spent some time searching online and every source strongly disagrees with your assessment of house prices vs. inflation. And the tax argument also fails here, since two people who own a home can exclude half a million realized gain from tax altogether, or leave it entirely tax free to heirs.
Not saying a home isn't a good investment. But on average, home prices have risen 4% y.o.y. in the US. Inflation target is 2% but is much closer to 4%. If you sell your house for $1m more than you bought it for, you can exclude 500K from capital gains, but you're still paying cap gains on the other 500K.
Bottom line: assume a 1% real profit y.o.y. on your home, then factor in closing costs (8%), and. then cap. gains on the profit. You didn't make as much as you think.
That was an excerpt, full poem is at https://bukowskiforum.com/threads/father-who-art-in-heaven.8....
> they may try really hard to hold onto that money by saving and buying appreciating assets.[...] their real wealth was only increasing by a modest 30K per year.
Not to mention the initial $1M increase, which you conveniently did not. And that's $30K/year they did not have to work for and that they would not have otherwise, so what's disappointing about that?
You can avoid a lot of needless drama by simply stating that the real rate of return, after inflation, would be about 4%/year.
And your tax argument is weak. Just as the parents left tax-free money to them, they too can leave tax free money to heirs simply by dying. There is no need to pay any capital gains taxes while they are still alive, if they simply leave the money invested. Even if they need some of it for expenses, the tax hit is much, much lower if withdrawn in smaller annual amounts than in one giant lump sum after ten years.
I don't understand your argument? You seem to be implying that if heirs don't withdraw any money then they will stay rich? Yes.
The point I was making is that most heirs might not fully understand tax implications, inflation, and that increases in nominal wealth != increases in real wealth. This all leads to generational wealth dying out, as well as for reasons mentioned by others in the thread.
What should they do ?
There are two ways, I feel.
1. Spend it. In some cases that might be a fair direction. It's easy to spend 1 million. It's very hard to spend 1 billion though.
2. Seriously learn about money and investing. Really it's not impossible! But of course it's a field full of hype, hype vendors, counter-intuitive ideas, non-obvious ideas, "math" - some simple some seriously not, and nowadays very counter-narrative directions, etc... So that new fantastic books are still being written on the subject (by people who actually know what they are doing, as opposed to banking on a potential best seller.) Basically, that becomes a serious endeavor - which few people are ready for.
A truly impressive non-answer.
Yeah, I'd personally like to here why passive investing 1~6 million dollars would be a bad idea, you might not get bill gates rich but I can't see it going horrible either. Sure you'd likely want to take some risks but it feels like you'd somehow remain well off so long as you kept reinvesting some of the profits you make.
> but I can't see it going horrible either.
Any type of investing can do horrible. Examples: you trust a financial expert who swindles you, you invest everything in a dying company/industry/company/asset class, you don’t rebalance or diversify, you don’t take advantage of accounting or tax law shelters.
You comment seems to imply that you are making unstated assumptions.
Pretty good illustration, thanks.
You mention "passive investing" and imho that's a good answer if you want minimum involvement of either yourself or a manager (say because you don't trust them - and you shouldn't).
But then in the same breath you mention "Sure you'd likely want to take some risks" and THAT is not an answer to the same parameters. Why? How much? What kind? With what personal involvement? Etc. Elsewhere you hear "multi-family housing", or "chain of laundromats". All these are one-sentence answers which come either from some random book (which might be very exciting, and not an investing education), or from the experience of someone (who may be lucky, or may be an expert in laundromat operation, perhaps both. May even have written a book or a blog.)
But wait, why is "passive investing" such a good answer, for that very specific circumstance? Because everyone says so? (except the people who say "real estate") Because I say so? So actually "passive investing" is the same kind of answer as "laundromats". It's a lazy pick, out of what floats around HN. I feel it's a fine answer IF minimal management is the priority. And IF you are going to say "Sure you'd likely want to take some risks", then it probably isn't.
And IF "passive investing" only, then how much do you withdraw? Why? "Surely you can't be too wrong if you withdraw 1% a year"? Really? But what if withdrawing 4%, or 8% meant a significant improvement to your life?
And let's question "minimum involvement"? Why is that a priority? Because you don't trust yourself or a manager? But shouldn't there be more considerations? Like how much spending would significantly improve your life? Like are you the kind that always worries about paying a mortgage?
To summarize: these are "shoot from the hip" answers which consider really very little of what deserves to be considered. Why should it considered? Well, How many work days - that is how much of your finite lifetime - does it take for you to save free and clear 1 million? Now that we have this number, how much does the 1 million deserve? I'm not trying to send people in a tailspin of decision paralysis. I'm pointing out that investing is a bit more complicated than "laundromats". I'm also not recommending that you become a professional fund manager while you are at it. There are extremes and the optimum (thinking and learning time) is nowhere near "passive investing"'s zero.
(And the context here is family wealth disappearing. If you are 9 years old, say, nobody is asking you.)
Spend no more than 1% of their investment per year and invest the rest. This means that if you inherit $10m (after taxes), you should really only be withdrawing about 100K (before taxes). On the remaining wealth, you hope to earn 7+% year over year to beat inflation and grow your *real* net worth over time.
Inflation is necessary, and a low, predictable inflation rate is good for the economy. But it's still a wealth tax of the worst kind -- it's essentially a flat tax on everyone regardless of their level of wealth.
Remember, a government with $35T in debt can't possibly raise that much money from taxes; 3 out of every 4 dollars we pay in income taxes already goes to interest payments on that debt alone. The government will instead inflate the debt away by paying it back with future dollars that are worth less.
Many high net worth individuals are aware of this fact, but blindly giving heirs millions of dollars and not educating them about the money system will inevitably lead to poor outcomes.
TFA and other commentors have some points, but I believe it's much simpler than all of the above:
Doing a thing is a different skillset than teaching how to do that thing. Nothing more to it.
If there was a self reinforcing loop where greatness begat greatness, it would be everywhere: every sport, every politician, every martial art, every resource, every industry - for centuries, millenia.
Greatness and teaching greatsness are merely correlated in the best case, and are just as often counterfactual.
https://web.archive.org/web/20240803165555/https://old.reddi...
https://web.archive.org/web/20240803165742/https://old.reddi...
Reddit has several fascinating glimpses in the mess that are (some) very wealthy and trust fund situations. Never clear which ones are somewhat fiction and which completely genuine but still interesting.
In one of your threads, there is the mention that there are still tons of these "old money" families around. Yes. But hardly any of them is in the Forbes list range of billion dollar wealth. When mechanically, most of them might still be somewhere around there, had money been managed better.
Another aspect: savings and investment habits. If you are born rich and have savings and investment habits that are good, you will remain rich. Savings and Investment habits are a large determinant. The article suggests that the prior generations' "worry about entitled behavior" is the second dominant cause, while financial illiteracy trailing behind at third (in order of presentation). But I find that quite misleading. Are the wealthy really wanting to put their offspring at a disadvantage because it is perceived as laziness? That's "patently false" as my friend says.
It takes time and serious work to learn about investing beyond clichés. Past even the basic professional level which is entirely "mechanical" - grounded in practices, not in understanding. Meanwhile if one heir is headed to med school and the other is going from vacation to harebrained scheme, what are you - the patriarch - going to do? Neither has time or inclination to learn seriously.
Luck. Model an agent that has some odds of doubling wealth, maintaining wealth, or halving wealth per iteration of some game. It's easy to generate downward trends.
Yes. TFA ignores what I think is the biggest factor. In researching family history, I've been struck by how important chance was regardless of how smart and hardworking they were.
Yeah it was a bit annoying they didn't mention luck in the opening of this article. That being said, work ethic and a some inoculation against nihilism are necessary ingredients.
Where does the 70% of families lose their wealth statistic come from?
They do not cite it, but searching that sentence on Google brings up a few articles mentioning a “20-year study by The Williams Group involving 3200 families, show that 70% of families lose their wealth in the second generation and 90% lose it in the third.”
But I can’t find an article in a quick check on er website.
There are some mentions on their website about how splitting the family fortune dilutes it and causes families to lose money.
There are families in Europe that pass the bulk of the family fortune to the oldest son. That son does what they can to help the rest of the family live comfortably, but the rest certainly aren’t rich. So, this statistic may only be applicable to American families or places where it’s common to successively divide the fortune up.
This piece seems to do a good job investigating it:
https://jamesgrubman.com/wp-content/uploads/2022/06/2022-06-...
The original source was a study in the 1980s examining 200 family businesses in manufacturing in Illinois, and since then a collection of financial advisors and estate planners have cited it (often without attribution).
Edit: As an aside, I understand that different industries have different standards - but it seems insane to me that any professional piece, let alone a well known brand like Nasdaq, would drop a statistic like that without any kind of attribution.
This is the entire premise in The missing billionaires - A guide to better financial decisions, Victor Haghani and James White, 2023. But this is an investing book, not sociology. They consider billionaires in the introduction and they point to the Forbes list rather than a specific study. Which is not unfair. Billionaires are counted and listed. Not hard to take a glimpse.
Their observation is counter to the usual cliché narrative that the rich have only one way. Up, can't lose.
Indeed if you consider that, starting with, say, one billion, I would be able to invest not too conservative, not too aggressive and still draw out insane amounts of money to "live on". Meaning that in theory, starting with a billion, there is only one way, up. Meaning that a billion dollar wealth, invested, should own the world after a few generations.
But this is obviously not what's happening. The Forbes list is full of relatively new wealth. Ancient wealth (more than 3 generations) stands out in the list. It's not common. And the highest wealth is first generation! And that's even though magazines tend to list the wealth of an entire family on one line - never mind that it's dozens of people.
The 2nd, 3rd Generations ahead are entitled to that wealth they did not work for it, they simply accepted it as a gift from there relative or mother and father. They are not matching each dollar pound for pound with sweat over there foreheads. Wealth squandered, I just didn't think that 70-90% lose there wealth, it seems like an immense number to me but when you consider how careless and uninformed people get, it is not entirely surprise.
It's just regression to the mean in all senses
can't this be summed up as lots of countries have laws (or historically had) against establishing perpetual trusts? It'd be trivial for someone like Gates to set up a trust that pays out to all his heirs indefinitely without them being able to directly extract the assets of the trust. If it were legal.
I don't think so. Doubling money in 10 years, on average, is nothing extraordinary. It's a little sub-par. Far more in some 10 years, less in others, sure. But doubling in 10 years.
So even a 50% inheritance tax, erm, "haircut", should be recovered in 10 years and clearly beaten after that by the next generation.
IF that was the only issue. It's not the only issue.
> The third generation never realizes the struggles and sacrifices the previous generations endured. The only thing they know if a life of plenty and have a real lack of understanding of what is needed to create and maintain the lifestyle they have grown accustom to.
Having made this perfectly valid point, the article seems to ignore it from that point on. Yes,that is the problem but can you fix it?
Yes you can. Apparently there are agencies that carry out intensive lifelong financial education that begins around 10 and carries on from there for very high wealth families. I read an article about it once but can’t find it anymore.
Shirt sleeves to shirt sleeves in three generations. I’ve heard this since I was young; this is hardly new.
Inherited wealth does not encourage frugality, nor does the third generation generally find working hard to be as fulfilling as the first did. You see a lot of artists and lifestyle businesses in the third generation coupled with a fairly plush lifestyle
The way the birthrates are going, there is a significant risk is that you won't even have any grandchildren to inherit the wealth.
I love how all these articles assume families are functional and they all act in the best interest of each other.
I submitted it because I saw a comment somewhere else about the rich being locked into unfair advantages and classes ossifying. Seems to not be true if these stats are to be believed.
It could also be interpreted as demonstrating the advantages that the rich have:
Even those families who somehow manage to build up wealth likely to lose it within two generations. Meanwhile the ultra-wealthy are able to continue being ultra-wealthy from one generation to the next regardless of how competent that generation is.
1% of 1 billion is 10 million. That is lot of money to spend on consumption. And in many cases such consumption doesn't necessarily entirely destroy spend money. Think of classic cars or art or real estate...
Only real way to destroy such amount of money is something stupid like starting an airline...
The ultra-wealthy territory is one were actually losing becomes hard, if you have even some moderation in actions.
Exactly. "The rich" as a narrative is everywhere. While in financial terms, it is not all that difficult to keep wealth growing. To the point that in a hundred years - not all that long - any "new wealth" should turn into a truly massive pile. But there aren't, or very few. On the contrary, the top of the Forbes list is mostly new wealth.
> Bringing in a Financial Planning Professional, ...
The article is an infomercial.
(2018)