By Dr. Jim Dahle, WCI FounderI hear the term “generational wealth” from time to time, and I have even written about just how difficult it is to maintain wealth in a family long-term. Yet I hear this frequently listed as a goal (not a SMART goal, but a goal nonetheless). The gist of it comes from ideas like this quote from Robert Kiyosaki:
“It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
I hate the quote. It serves a good purpose in that it focuses you on wealth rather than income as the definition of rich. But I hate that it extends “the game” into eternity. Now, the game cannot be won. You cannot have “enough” because now you need enough for an interminable number of generations beyond yours, and as I wrote before, that's impossible.
Defining Generational Wealth
There isn't even an agreed-upon definition of how much it takes to have generational wealth. I mean, generational wealth is just a fancy phrase that we used to call an inheritance. If you leave $1,000 to your kids, they've technically got generational wealth! However, I think the general idea here is that you are leaving a large enough inheritance to have a meaningful impact on their life. That's not $1,000. Unless you're leaving it to them at a young age, it probably isn't even $100,000. We're talking about leaving a seven-figure amount.
Schwab did a survey asking people to define “wealthy.” They came up with a net worth of $2.2 million. So, I guess if you leave your heirs $2.2 million a piece, you've done the generational wealth thing.
The only hard definition in estate planning is the estate tax exemption. In 2024, that amount is $13.61 million ($27.22 million married). Of course, that gets split up between heirs. If it all went to one heir, that's a whole lot more money than if it is split between five or 10. But if you have an estate tax problem, you can consider yourself to have created generational wealth. I think most white coat investors would agree that most doctors can retire happily, successfully, and indefinitely on $5 million. If you're leaving $5 million to heirs, you've left them enough that they can not only do (in the words of Warren Buffett) anything they want, but nothing at all if they so please. I'm not saying that people can't spend more than the amount $5 million will provide long-term. That's not enough wealth to afford a NetJets subscription, for instance. But it's still a big old chunk of money and almost twice my original retirement nest egg goal—at least before adjustment for inflation.
Habits, knowledge, education, and lifestyle are also passed down. It's not just about the financial assets. Obviously, most of us want to leave our kids as much knowledge, education, and good habits as we can. That's not exactly a “rich person” thing.
More information here:
Do You Even Want to Leave Generational Wealth?
Perhaps the biggest ethical dilemma is whether you even want to leave that sort of an inheritance behind. You can ruin someone's life by leaving them too much money in the wrong manner at the wrong time. Giving is hard. Giving is work. Doing it wrong has consequences. For example, we now have an adult child. If we were to be hit by a bus tomorrow, she would not come into her share of the inheritance for many decades. Too much potential to ruin her life to leave all of that at once to a 19-year-old. There are better ways to do it and that usually means some kind of a trust. You always have an outlet, too. You don't have to leave it to heirs; you can always leave it to charity.
How to Build Generational Wealth
If you really want to build generational wealth, you're going to have to do things a little differently. We're not talking about basic “doctor rich” here. Doctor rich is making $300,000 a year, saving 20% of it, working a full career, retiring with $5 million or $6 million, living off it in retirement, and leaving behind $6 million or $8 million split between three or four heirs. That's what most of us will do, and it's nice. It's a great financial life, and your heirs will appreciate it. But the life of your heirs probably won't be all that different from yours, and chances are that very little of the wealth you pass on to them will make it to the next generation. Studies suggest that only 30% of wealth inherited by the second generation makes it to the third generation, and only 10% makes it to the fourth generation.
You're going to need more money to do this. How do you get more money? You take the basic formula for getting rich and expand on every sector of it. Here's the basic formula.
- Make a lot of money ($300,000?)
- Don't spend a lot of money ($175,000?)
- Invest the difference in a reasonable way (stock and bond index funds?)
- Don't lose your money to death, disability, liability, fraud, speculation, burnout, etc.
How do you expand on that if you want $20 million-$100 million instead of $5 million-$10 million?
- Make even more money ($1.5 million-$2 million+?)
- Invest a huge chunk of it ($1 million+ a year)
- Invest at least some of your money into small businesses you control (that hopefully become large businesses) and leveraged investment real estate.
- Don't lose your money to the usual issues (as well as estate taxes) by doing estate planning early and getting those rapidly appreciating assets out of the estate and into trusts
More information here:
Dynasty Trusts: A Multi-Generational Estate Planning Tool
Don't Be Surprised (or Angry) When the Next Generation Lives Differently Than You
Fly first class or your heirs will is a truism for everyone. Your heirs are going to live differently than you did. They may not be as motivated to work. Despite this, they may be even more wealthy than you because they started on third base. Their spending habits are almost surely going to be different from yours, usually higher at an earlier stage of life. My kids have already been on more “once in a lifetime” trips than most people ever go on. I'm kind of jealous of their lives since I only left the state I grew up in three or four times before turning 18.
But if this is what you are trying to create, don't be surprised when you create it. I have found that people generally get what they most desire. If they most desire wealth or fame or power, they usually get it. If they most desire meaningful relationships, they usually find those. So, be careful what you desire. As a man thinketh in his heart, so is he. As James Allen expounded on that Bible verse, “A man is literally what he thinks, his character being the complete sum of all his thoughts.” What you think about when you can think about anything you want really tells you who and what you are.
If you don't like it, change it.
What do you think? Is generational wealth one of your goals? What does that mean to you? What are you doing to reach it?
Generational wealth is possible, but difficult. In VA, Shirley Plantation is the oldest family business in the US dating back to 1614. It’s now an LLC owned by the family.
In CO, the Treaty of Guadeloupe Hidalgo recognized Spanish Crown land grants and some of those families still own vast tracts of land; they are now LLC’s owned by the families.
I really appreciated this post after on the podcast I think you used the word “petrified” that you’d ruin your kids by leaving them too much. Really thoughtful elaboration
Unrelated question about the usual doctor route of making $300K and then spending $175K to build wealth—Is that $300K pre tax and $175K post tax? I would think not because then you wouldn’t really be saving sufficiently to build wealth. The real number assuming a 33% effective tax rate and then a 1/3 savings rate (including retirement and other goals) is living on ~130K correct?
If you make $300K, pay $75K in taxes, and live on $50K, that leaves you $175K to use to pay off debt or invest.
Gotcha those numbers make more sense for the live like a resident period. Thank you for the clarification
I think my misunderstanding is because we tend to think about our income on pretax money and tend to think about our spending on post tax money. $300K income:$130K spend is a very nice lifestyle it was just for accuracy’s sake
I agree. Or for someone who wants to get to “generational wealth”. Live like a resident for 30 years on a doctor income and you’ll leave generational wealth.
A quote from James Madison applies “ I must study politics and war… so that my sons can study mathematics and philosophy, navigation, commerce and agriculture so that their children can study painting, poetry and music.”
No guarantee that the generational wealth will motivate your heirs to do something useful though instead of wasting away in luxury or substance use (as some wealthy in the news do).
Money is like chocolate or a rich dessert — enough is good, but way too much isn’t. Hard to imagine that a society where everyone is wealthy at 18 would survive — who would staff the hospitals as 2 am on Saturday night?
A bit pedantic, but note that the quote “—I must study Politicks {sic} and War that my sons may have liberty to study Mathematicks {sic} and Philosophy…” is from John Adams not James Madison. Specifically, John Adams to Abigail Adams 12 May, 1780.
Thanks for the correction — I vaguely remembered the quote but internet search apparently failed with the correct details.
Solid post. And I wonder every day if I am doing something good or something bad for my future generations by trying to create “generational wealth”. A nice quote from Buffett that I always liked was “I want to leave my children enough so that they can do anything, but not so much that they can do nothing”.
I really appreciate that you don’t just parrot that ‘ more is better’.
What we value, and what we want our heirs to value matter.
And so many think they can control what happens after they are gone.
I hope the example I set has the most impact
Why would someone want this? Their child ends up robbed of purpose and miserable. They grow up knowing there’s nothing they could ever accomplish that would measure up to what their parent did. And the easy money makes self destruction all the more accessible.
By all means, financially help your kids get a good start, but don’t give so much that they can do nothing.
I want this.
Parent to a neurodiverse kid with a learning disability. Unclear what her employment potential is; but I imagine she would live hand-to-mouth if required to support herself.
My goal is to set her up financially so she can live modestly off of the dividends of her trust from the get-go.
I’d rather she be a happy, contributing cupcake decorator or dog walker or daycare helper than live in poverty.
Obviously, this plan is not risk-free, but it beats the alternatives as I see them.
The question of what is your end game is a great one. Building wealth is important, but you also want to be able to enjoy some of it along the way. Your kids will always remember those trips and adventures that you went on together, and they don’t necessarily have to cost a ton of money.
I enjoy this kind of article, thanks for writing them. There’s a lot to consider as wealth increases, and this is an important one.
A slightly different angle on it that concerns me, is that my kids may be exposed to the lifestyle of wealth, but then (potentially) never inherit it. I constantly worry that my kids have no understanding of what a 5* hotel’s luxury is, and that they’ll lack resilience and have entitlement from exposure to such comforts
I already have it. It’s called BTC.
Brace yourselves. You aren’t going to believe what’s coming.
One challenge is that many of us will live until our children retire. So if you’re talking generational wealth you’re talking about your grandchildren unless you give it to your heirs while you’re still alive.
I would seriously consider doing just that. $5-10k in their 20s may mean more than $500k in their 60s-70s – so why not give a partial “inheritance” early?I love the idea of WCI’s “20s fund” for his kids.
The track record of very wealthy families in the U.S. at least creating ‘generational wealth’ is rather poor. By the third generation or so, the wealth is usually gone.
It seems to me that generational wealth has more to do with leaving behind a wealth-generating mindset for your heirs than a pile of money.
If you want a goal less daunting than generational wealth, you could aim towards leaving a legacy. Most local charities would realize a real change with amounts of about $100,000. As far as family goes – it can be life changing for young families to get amounts of about $500,000. They can eliminate debt, find optimal housing or even start a business.
It’s what you leave in them not what you leave for them otherwise 95% of families are doomed