By Dr. Jim Dahle, WCI Founder
I sat there for a while thinking about it. Then, I realized a couple of things.
First, I don't actually want to be a billionaire—at least not in terms of today's money and barring a crazy level of inflation. I don't want to do what it takes to become a billionaire (and yes, I am aware of what it takes), and I have learned that beyond a certain point, more money = more problems. Yes, money solves problems, but it also creates them. If you've never had a problem created by your money, I hope you can have enough money to experience that someday. (I also wish people the opportunity to travel enough so that they know what too much travel feels like and to have enough time off so that they know what too much time off feels like.)
Second, this conference speaker has no concept whatsoever of “enough.” The concept of enough is perhaps best explained by Joseph Heller. Authors Kurt Vonnegut and Joseph Heller were at a party given by a hedge fund manager on a fancy island in New York. Vonnegut pointed out that the host had made more money in a single day than Heller had made with all of the sales of his popular book Catch-22 in his entire lifetime. Heller responded, “Yes, but I have something he will never have—ENOUGH!” I'm pretty sure that speaker had never heard this story, or if he had, he thought, “That's nuts, why would someone not want more?”
An Optimal Amount of Wealth
I once listened to a conversation between a couple of friends (an attorney and a businessman) who were discussing the optimal amount of income. This was enough income that you could buy whatever you wanted, but not so much that your tax rate became “too high” or that people were trying to get you to give them your money or that you had to work too much to get it or whatever. It's been a few years since this discussion, but they eventually settled on an amount in the $300,000 per year range.
Lately, I've been wondering if perhaps there is an optimal amount of wealth, too. This would be enough wealth that you never had to worry about money and could buy whatever you wanted, but perhaps not enough to have to worry about estate taxes or ruining your kids or kidnappings or not having enough friends in the same socioeconomic class or any of the other problems that come with having more wealth. I have no idea what that amount might be and it might be different for different people, but perhaps $10 million might be a good place to start the discussion.
More information here:
Stop Playing When You Win the Game
7 Things Wealthy People Don’t Have to Worry About (and 7 They Do)
How Much to Leave Kids
I've written before that there are three questions to wrestle with when it comes to inheritances.
- How much to leave your kids (presumably vs. spending it yourself or giving it away)?
- When should they receive it?
- What conditions must be fulfilled for them to receive it?
Clearly, dumping millions onto an unprepared 18-year-old is a terrible idea, but that's about where the agreement ends. Most people leave it all to their heirs, although that doesn't necessarily mean life-changing money for the heirs because most people just don't have that much—especially when divided between multiple kids. In fact, one reason people often leave nothing until their death is that they're not yet sure if they'll need it all themselves! Other people plan to leave nothing to the kids, giving it all to charity. Naturally, there are also plenty in the middle, who will leave some to charity and some to the kids. So, not everyone aspires to generational wealth. Estate planning is extremely individual.
Why It Is So Hard to Create Generational Wealth
The statistics are damning. You might've heard the phrase, “Shirt sleeves to shirt sleeves in three generations,” and the statistics back this up. When a wealth creator (Generation 1) creates wealth, 70% of it is gone by the time Generation 2 is gone. Ninety percent of it is gone by the time Generation 3 passes away. The Vanderbilts are the classic example. Cornelius Vanderbilt was the Warren Buffett/Bill Gates/Jeff Bezos/Elon Musk of his day. Six generations later, we have what? Anderson Cooper? With a net worth of something like $50 million, almost all of which he earned himself? And he's probably doing better than anyone else in his generation of that family.
He reportedly inherited only $1.5 million (all his mother, a member of Generation 5, had left) of a fortune estimated to be worth $200 billion in today's dollars. The fortune is, for all intents and purposes, gone. I've written before about why this occurs. The reasons include:
- Division among multiple kids in each generation (the great British aristocrats and nobility avoided this by leaving it all to the eldest son)
- Excessive spending/lifestyle by heirs
- Estate taxes
- Lack of drive among heirs
- Lack of training among heirs
- Financial catastrophes
- Family fights
More information here:
Should You Even Try?
If almost no fortunes last even 100 years, should you even bother trying to make your money somehow last that long? Even if the heirs are extremely careful in maintaining and growing the fortune, they, at a minimum, have to make up for a 40% estate tax haircut every 20-30 years. Their best bet is probably to take a page from the British aristocrats and leave the majority to just one of the kids.
But that just doesn't seem right to our American ethos. What are the odds that every generation is going to feel that way? You can also leave the money in trust for just as long as your state will allow. That can be a very long time, but it does require you to “rule from the grave” by outlining exactly how that trust is going to work over the years. That doesn't seem like quite the same thing as “generational wealth,” where a family stays wealthy for many generations in a row. Maybe instead of trying to establish generational wealth, it's better to just leave them enough to “lighten their burden but not remove their struggle.”
I don't have the answer, but every time I hear people talk about generational wealth, I certainly have the question!
What do you think? Is generational wealth a good goal? What does it mean to you? Do you think there is an ideal income or net worth? What is it? How much will you leave your kids, when, how, and why?
I think the main question I have is whether one of Elon Musk’s great-great-great-great-grandchildren will host a show anywhere near as good as the Mole.
You cannot control other individuals. You cannot control what your kids want to do. I have two brothers, we all had a similar upbringing. However, our view of the world and our motivations are completely different. Building “generational wealth” may be squandered slowly, squandered quickly, maintained, or grown by the following generation. However, receiving generational wealthy certainly opens more business opportunities and allows an individual to take slightly more risk pursuing their own individual passions. Inheriting a large amount of wealth at a young age certainly poses the risk of “ruining” someones motivation and drive. My perception of money and wealth is completely different mid 30s compared to age 18. However, a large inheritance is unlikely to “ruin” someone in there 30s or 40s. If they squander the money, they likely would not have built much wealth anyways and been in the category of people who live paycheck to paycheck. I think trying build generational wealth is a good thing. Best case scenario you empower your heirs to live a great life, worst case they squander it and probably would not have built a healthy financial life anyways.
I think the ultimate definition of generational wealth is that someone receives an inheritance in their late 30s – early 40s that would allow them to not work. I think for some individuals this would allow them to do great things in the world, and for other individuals they would not do much.
I hope to leave my grandchildren with decent money for education (as with my kids to make up for their families being too well off to qualify for financial aid), and a country where no particular classification other than due process convicted criminal interferes with life, liberty, and the pursuit of happiness. There is a good chance some descendant of mine will be gay, handicapped, an immigrant, not white, etc. let alone I myself am already differently abled (than 40 years ago) and may become even more so before I die. The 529s are much more successful so far than the optimal (to me) country politics LOL. I don’t have Koch Gates or Musk wealth.
Also hope my kids and grandkids do the same for theirs but 70% of them doing so would be fortunate it seems. Good illustration with Cooper and the Vanderbilts- for a few generations you can give that headstart that some will benefit from but not all will. (BTW for Cooper his startling good looks are as key a genetic gift to his success as his education and any money inheritance. But money for exercise conditioning and cosmetic procedures can help with that as well.)
We have all heard money doesn’t fix behavior problems, it amplifies them.
Faith in God, morals, values and character are the best inheritance. Add money and you have a person ready to thrive with generosity in all things.
Education (+\- money) without morals creates a menace to society.
I think money can be a blessing but character has to precede the benefits.
The real struggle is there not the money.
Well said. Us eight kids grew up with little money but rich and all the things you listed. Financially, most of us have enough.
I love this – some excellent insights about the nature of “passing it along” and the associated pitfalls. I’d add only a minor quibble, which is I’d ask you to divide the question. “How much is enough?” is not the same as “Why do you want that much?”
The former doesn’t necessarily imply a desire to leave a legacy. It could just be a desire to not have to worry about money anymore. The latter offers options: you may want $xx million so you don’t have to worry about money anymore; or it may be because you’d like to leave a legacy that forms the basis for generational wealth.
The problem with the ‘not have to worry about money anymore’ answer is that when you have $3 million, $5 million seems like the right amount to put your feet up and relax into the good life. However, at $5 million, suddenly $8-10 starts to look about right.
I can’t speak to numbers higher than that, but I do wonder whether those with $20 m are yearning to hit the $50m mark so they can _________ (fill in the blank). Etc etc etc.
Anyway, love the opening vignette about Heller and Vonnegut. And happily, I can report I have ENOUGH, too.
When our first grandchild was born 23 years ago, my wife said why wait until we are dead to pass on money when the heirs have little need for it. Our three kids are married, in successful, rewarding careers, and each has three children. Their earning potential is significant but may not reach the level we have achieved. My wife’s plan; fully fund 529s for the nine children and allow the families to divert their own funds to travel, home remodeling, their retirement or other endeavors without worrying about educating their children.
Watching our kids benefiting from this has been very gratifying and proves, once again, that my wife is a lot smarter than me. The main charities we support will receive legacy gifts when the time comes and our heirs should benefit handsomely, but not life changing. Job well done….we hope
“I consider a Pyramid as a monument to the insufficiency of human enjoyments. A king, whose power is unlimited, and whose treasures surmount all real and imaginary wants, is compelled to solace, by the erection of the Pyramid, the satiety of dominion and tastelessness of pleasures, and to amuse the tediousness of declining life, by seeing thousands laboring without end, and one stone, for no purpose, laid upon another. Whoever thou art that, not content with a moderate condition, imaginest happiness in royal magnificence, and dreamest that command or riches can feed the appetite of novelty with perpetual gratifications, survey the Pyramids, and confess thy folly.”
– Samuel Johnson, Rasselas (1759)
Hey! That guy is a meme!
This is a fascinating topic. And the story about the Vanderbilts is very interesting.
One thing that should be on the list is “Opportunistic financial advisors”. There’s a book by Barry Ritholtz that details a family in industry whose two advisors made over a billion dollars EACH. The family’s net worth is listed in the $30 billion range today.
Joey:
Someone with that type of wealth certainly knows the value of advice. If it is free, it is worth exactly what they pay for it. At that level they can do comparison shopping if they are so inclined and yet they consciously hired the two advisors and had to by law know what the fee arrangement was before they hired them. So, while it may seem high to you, you weren’t paying them. Remember, “Long after the price is forgotten, the value remains. ” I would think if they were worth $30 BILLION, they did OK with the advisors. What do you think would have been a fair fee???
All you have to do is google the article and you can see they massively underperformed benchmarks. “So far that big bet, along with other gutsy consumer wagers, has been a flop relative to their own benchmark index for success. If the Reimanns, the reclusive family behind JAB, had instead invested in a low-cost fund tracking that index, they would be worth more than $50 billion, richer than the dynasties behind Hyatt Hotels, Anheuser-Busch InBev and Ferrero chocolates, according to data compiled by Bloomberg. Instead, JAB’s mixed track record means they’re worth about half that.” So I would argue, there’s no “value remains”.
10 million seems about right for no money worries. Too bad most doctors won’t ever amass that much (although maybe some of your readers will).
Fortunately you need much less to retire comfortably if older. To be able to stop working in your 30s – 40s with a family and live the same lifestyle as the average doctor takes a huge amount of money.
One of the wisest, real-life discussions/recommendations on this topic is from Ted Oakley, founder and managing partner of Oxbow Advisors. You can get a complimentary copy of his latest book, “Second Generation Wealth,” by going to OxbowAdvisors.com
Easy read and great advice.
This was always in interesting question to me. I always thought that I’d like to create generational wealth that would only be given to my next generation of they were hard workers themselves but unless I die early they won’t see that money until they are themselves older….hopefully. Ha. I definitely will leave something to them but I like Jim’s approach to giving some earlier in their lives to help them get a start I didn’t have. If they squander that I know now to give the rest.
I am a big fan of trying to give money to the kids during the years that they really need it, and it can make a difference in the trajectory of their life. There is also the old saying, “Give-th while you Live-th, so that you Know-eth where it Go-eth.”
$10M definitely seems like a good place to start the discussion of “Enough.”
Maybe my perception of what is generational wealth is too low or too few generations, but the federal estate tax doesn’t kick in until just shy of $14 million. If I had that much to divide among my 4 children, I’d definitely consider that “generational” wealth with no tax haircut. Probably wouldn’t be more than one generation though.
In terms of contentment, there is no difference between having $10MM and not wanting it, and the latter is a lot less trouble. I seriously doubt those who suggest $10MM as the worry-free number will actually be worry-free when they achieve it. And even if they are, it’s quite sad for them, since they could have been worry-free with so much less. For thousands of years, every serious thinker on the topic has come to the same conclusion.
This is true.
When I retired at 52 in 2015 with about $2 million my wife wondered if it was enough, and what others thought was enough.
I told her the problem was that the people we knew (non doctors) in our lives wouldn’t ever imagine having that much. And the people I worked with (doctors) would think it wasn’t enough.
Also at the worst we’d be broke at 65 with SS and a similarly sized pension. Turns out our net worth has grown. But that’s both due to luck and modest living.
Love how people have glommed onto the $10 million figure. But let’s go back to the article to see what I was really saying with it:
Note that $10 million is far more than “enough” for many/most people. Our original “enough” number in our 2004 plan was about $2.7 million, or about $4 million in today’s dollars. Enough is just a function of what you spend/want to spend.
But I like your point that, as Diogenes said, “He has the most who is content with the least.”
Empires break apart, monuments crumble and fine art turns to dust over the years. If even mankinds most superlative accomplishments do not last centuries, then there is no inherent long term purpose to an individual building “generational wealth” as even one generation can and will squander a fortune though mismanagement or bad luck. The only reason to try to build “generational wealth” is if one finds purpose and meaning in the pursuit of building “generational wealth.” It has to be more for “love of the game” of fortune building than anything else — the goal itself is a meaningless void.
I personally find meaning and purpose in my work of orthopaedic surgery and helping patients walk again and providing relief from pain and suffering. To me the financial wealth this career creates is a byproduct of the hard work and valuable service we provide to patient’s and their family, but it is not the main objective. The true wealth in this career is in the life changing surgery we do for our patients.
I’m hoping to build a fortune of 10M by around 50 years old as that is my never need to worry about money again number and will allow me to ease some of the struggle of the next generation. I don’t believe this will be “generational wealth” and doubt it will pass on beyond one or two generations. At 50, I hope I still love what I do as much as I do now and hitting the financial goal will not be my clock out point. If I don’t then following the tenets of WCI will allow me to shift my focus and energy to other fulfilling life goals.
I’m always struck in conversations like this how little so many people think about charity. In my world (and I think this is true for many doctors), I’m able to prioritize giving my kid(s) great education (both from me and my wife, as well as formal education), and they will have lots of doors open to them. We will gift them all the human capital (sometimes via our financial capital!) that they could ever need to live a comfortable life, and if they choose to focus on the arts or non-profit work instead of higher-paying roles, we will be proud of their sacrifice, but don’t expect to pay their bills for them — they will be adults!
Notwithstanding any disabilities or developmental disorders, of course, the money that my wife and I potentially accumulate beyond what we need to live out hopefully-long-lives will go to charities that help people in need — unless or kids end up needing charity, which is pretty rare in our social circles, it doesn’t seem like they will need big inheritances. The focus on generational wealth from people is always a little confusing for us from this lens. Everyone can choose to prioritize whatever they value, and we certainly give our kids some “luxuries” that they don’t “need” but enrich their lives. But that’s when they’re kids.
I am currently reading the book “Die with Zero,” which I believe you have read Jim. I would recommend it for a slightly different perspective from the general one out there. If anything it has really made me think more intentionally regarding spending on experiences before we may not be healthy enough to enjoy them and also to seriously consider giving more substantially to our children when they would most need it (hopefully way before we die).
Not sure why you think that’s different from the lessons others take from the book. Those are two of its main points.
I meant the book is a good counterbalance and different to the general perspective out there to give money when you die to your kids. A little different perspective but related to the topic you are discussing here. Sometimes focusing on the details has you miss the big picture and I think that book is a good one to help with bigger picture thinking.
What an excellent article on what it means to be “fairly” wealthy. The notion that there is a sweet spot for the degree of wealth is spot on. We’re in the supposedly dangerous third generation, but there is no danger of us blowing it. I think that is partly because the original nest egg created by a doc who made some prudent real estate investments was a tidy sum, but not a bewildering fortune. Despite his success, he maintained a comfortable, but not excessive lifestyle.
The next generation was well educated, but without lucrative professions. With careful management, the nest egg had nonetheless been maintained before being passed to us. Another doc in this generation, plus a knack for the capital markets, has seen it increase nicely.
This year we decided to pay out quarterly installments to our adult children, to help them along. I was surprised by my son’s reaction. He basically said, that’s nice, but I won’t touch it, it will just go into a portfolio for his children. So the fifth generation is already getting set up.
It really comes down to attitude. Is wealth about education, comfort, time and relationships, or is it about showing the less fortunate just how successful we are in comparison? In my view, it is the pursuit of wealth for status and power which gets very messy and creates instability which makes the successful passing of wealth to the next generation so tricky. The values we pass on, are probably just as important as the capital.
With wealth, as in medicine, it is important to get the dosage right and have a healthy attitude.
Passing on financial literacy and discipline matters more than the money itself for sure.
Love this topic! It’s a question I probably think about too much…
When I teach personal finance to law students, I ask a version of this question using the $10M figure at the beginning of the course. I want my students to get in the mindset that there’s more to life than just maximizing earnings.
The problem is that when you’re in law school, it’s easy to get blinded by the potentially high salaries. At the same time, there’s little attention given to the grueling hours and high burnout rate. I want my students to envision what life would look like if they didn’t have to work for money. What if they used their skills for pursuits truly meaningful to them?
What’s most interesting is the responses I hear from my students. Like you pointed out, even young people at the beginning of their careers seem to recognize that there’s such a thing as too much travel and too much time off.
This makes sense to me. Your typical law student, like med school students, has been a high achiever for most of their lives. They’re not wired to sit around and do nothing.
Instead, they tell me that they would follow other pursuits, like teaching, coaching, writing, volunteer work, etc. What each of these responses has in common is that they challenge the mind and provide a sense of purpose. Isn’t that what most of us want from our careers?
The sad part is that most of us end up chasing the dollar in our careers and ignore these other pursuits. It’s as one commenter mentioned above: once you hit $10M, why not go for $15M or $20M? You obviously have skills and are good at what you do to even entertain the question. It takes what I would consider a very enlightened person to be able to leave that behind for other pursuits.
Great post, thank you!
Matt