How to Build Generational Wealth for Future Generations

June 25, 2021
investment strategy

For the typical American, it’s recommended to have a net worth of $514,280 at the age of retirement. This will cover most costs that come up later in life, especially if some of that comes from solid investments.

Unfortunately, the average net worth of people in their 60s to 70s is only $266,000.

As the cost of living continues to rise, people need more money to comfortably get through their golden years.

But it’s not just the financial hurdles that come in the later years that matter. Adults of all ages struggle to make ends meet due to financial limitations and the cost of living.

That’s why it’s important to build generational wealth for the future. In this post, you’ll learn about the benefits of generational wealth and how to build it for your family.

What is Generational Wealth (and Why Does It Matter)?

When people talk about generational wealth, they’re generally going to be talking about any sort of asset that a family member passes down to their children, grandchildren, or other relatives. 

Generational wealth can take loads of different forms — from cash and investment funds to properties, stock shares, bonds, or shares in some sort of family company.

Above all else, the passing down of generational wealth is designed to help secure the financial future of your loved ones moving forward. 

If you started from the bottom rung of the financial ladder, nobody’s got to tell you why generational wealth matters.

For one thing, college graduates don’t just leave school with a fancy diploma — the average student loan debt per borrower at the point of graduation in 2020 was $36,635. 

Line graph showing how student debt has risen between 2007 and 2020
(Image source)

But that’s just the tip of the iceberg here. 

Add in the stress of trying to save for a downpayment on a first house, paying for a wedding, the cost of starting a business, and everything in between. 

If you amass wealth to pass down to the kids in your life, you’ll give them the best possible start in life by sharing your financial legacy.

You may be in a position in which you’ve already accumulated quite a bit of wealth.

But now that the next generation of your family is starting to grow, you might be starting to think about how you can pass that wealth down to secure their financial future.

By learning how you can continue to build and then pass that generational wealth on, you’ll truly be making a difference in the lives of the people you love — not just in 10 years’ time, but in 50 years’ time.

Benefits of Building Generational Wealth

The key benefit of building generational wealth is pretty obvious: you’re empowering the next generation of your family with the gift of choice. By passing on your wealth, you’ll be able to help rid them of the debts and financial limitations that tether many of us.

But by working to build your family’s generational wealth now, you’ll also be able to educate the children in your life about that wealth along the way — before it’s time to hand over control.

One recent wealth management survey found that 44% of high-worth individuals in America are genuinely worried their children are going to lose the family’s wealth when it comes time to pass that wealth on.

That’s why it’s absolutely critical to teach kids about generational wealth before you’re ready to pass on any assets. 

This will give them time to develop the financial literacy skills they’ll need to responsibly manage the wealth you’re gifting when the time comes.

Illustration of girl placing coins in a piggy bank.

Financial literacy is the knowledge needed to make financial choices. 

Financial literacy skills include understanding how to budget, how credit works, the power of compound interest, how the stock market works, pensions, and other essential knowledge related to good money management.

Getting the children in your life involved in the building of generational wealth will help them to develop those literacy skills and learn how to make the right sort of financial decisions that have enabled you to reach success.

How Much Money is Considered Generational Wealth?

The US is on the verge of a major generational wealth shift — which means that a whole lot of assets are going to change hands over the next few years. 

In fact, millennials are on track to inherit a jaw-dropping $68 trillion from baby boomers by the year 2030. That should certainly go quite a way towards bridging the current generational wealth gap. 

At present, your typical baby boomer has got 10 times the wealth of a millennial.

Chart showing differences in US household wealth by generation.
(Image source)

For many young people, that transfer of assets can’t come soon enough. 

Almost half of Americans now say the country’s rising cost of living is a serious threat to their financial existence — while 44% say the rising cost of healthcare causes them the most financial anxiety. 

House prices are through the roof compared to what many baby boomers experienced when they were trying to climb onto the housing ladder. 

Then there’s student loan debt. The average student loan debt at graduation has gone up by 76% since 2000. That means student loan debt has outpaced inflation by 41%.

Then you’ve got to consider retirement savings. We’ve already pointed out that a financial advisor would recommend you accumulate more than $500,000 worth of assets to cover the cost of your retirement.

One of the best ways you can protect your loved ones from stressing about how they’re going to pay for school, doctors, or retirement is to start building your generational wealth now and creating an estate plan to transfer that wealth at the right time.

There’s no magic number you should be shooting for when it comes to how much money you’re building for your family’s future. 

After all, anything is better than nothing.

But by putting the right tools in place and utilizing investment vehicles that match your income, financial goals, and plans for the future, you should be able to accumulate enough wealth to secure your family’s future.

How to Build Generational Wealth

If you’re already got access to a reasonable volume of assets to pass on, that’s incredible. But you may need to start from scratch — and that’s OK, too.

You’ll just need to carefully consider the strategies that are available to you, and how you can reasonably and responsibly acquire assets and save for the future. 

How you go about building wealth is going to depend largely on your investment timeline, the ages of the children you’re saving for, your investment style, income, lifestyle, and way more.

But generally speaking, there are a few foundational strategies you can put in place now to start growing your family wealth for the future.

Build a nest egg

When you hear about a “nest egg”, people are normally talking about a substantial cache of assets that they’ve been saving for a specific reason. That reason could be to fund a wedding, college education, pay for a child’s first house, retirement, or anything else.

Illustration of smiling adult and child next to shield.

Because building a nest egg is all about funding the future, this is for relatively conservative investors. 

The point is to secure your family’s future — so you’re not going to want to invest in high-risk assets. That’s why it’s generally advisable to build a nest egg using low-risk assets like bonds, a certificate of deposit, blue-chip stocks, or real estate.

Create a custodial account

One of the easiest ways to build generational wealth for a child in your life is to set up a custodial account.

A custodial account is a type of tax beneficial investment vehicle that enables an adult to set up an investment account on behalf of a child beneficiary. 

As the adult custodian, you’re responsible for managing the assets in a custodial account and making investment decisions — but even though you’re temporarily in charge, everything in the account legally belongs to your child beneficiary.

This represents a big tax saving for most families, because it means that unearned income generated in a custodial account is taxed by the IRS at the child’s lower rate up to a certain threshold.

When the child beneficiary reaches the “age of majority” in their state, the custodianship ends, and everything in the account gets transferred over to the child. In most states, that age is either 18 or 21.

If this sounds like a path you’re interested in pursuing, you should really check out EarlyBird

Using the EarlyBird app, you can easily build generational wealth and invest for kids using an intuitive fixed portfolio model. You can choose from multiple exchange-traded fund (ETF) portfolios based on your risk appetite, the age of the kids you’re investing for, and your investment style.

Screenshot of mobile view of EarlyBird app

Then, your relatives, friends, neighbors, coworkers, and anybody else can gift money to a child’s account using the app — helping you to build generational wealth even faster for the kids you love.

Create a trust fund

Another flexible way you could build generational wealth for future family members is by setting up a trust fund.

Families normally use trusts as a way to reduce their tax liabilities. 

By setting up a trust fund, you can normally protect the total value of your estate by reducing the amount of inheritance tax beneficiaries will need to pay when those assets are passed down. 

That being said, beneficiaries will normally still have to pay capital gains tax on any profit generated through the trust. 

It’s also important to note that, depending on the type of trust you set up and the rules in your state, you may be relinquishing some control over your investments to third-party trustees even before you’re ready to pass generational wealth down the line.

Invest wisely

It might sound a bit obvious, but one of the most important things you can do to build generational wealth is just to be smart about how you invest your money.

There are loads of different ways you can invest your existing wealth. You might consider real estate investments, company stocks, government bonds, ETFs, mutual funds, commodities like gold, or anything in between. 

But before you start investing, take a reasonable amount of time to consider whether the choices you’re making are the right way to go about investing for kids.

Points you need to think about when selecting the right investment to build generational wealth include your investment timeline, existing investment portfolio, how many children you’re saving for and their ages, anticipated contribution limits, and the flexibility of any investment vehicles you’re choosing.

Illustration of woman drawing curve on line chart

For example, you might think about investing in a 529 plan to build generational wealth that can go on to fund a child’s future education. 

But it’s important to remember that 529 plans have pretty strict rules on what sort of educational expenses can be covered by your assets. 

If the kids you’re saving for decide not to go to college, reinvesting your money and the tax implications of those transfers can be a real headache.

Translation: you’ve got to understand who you’re investing for, what you’re investing for, and then carefully weigh the pros and cons of each opportunity available to you.

Ways to Pass Down Generational Wealth

How you choose to pass down generational wealth will ultimately depend on the investment vehicles you’ve chosen to build your wealth.

For example, you might decide to name beneficiaries in your will that include the next generation of your family, or pass on your existing properties or accounts. 

But one of the most hassle-free ways to pass down generational wealth is to go for an investment vehicle with a built-in mechanism designed to transfer wealth without you having to lift a finger.

If you go for a custodial account, your named beneficiary will automatically inherit the wealth you’ve accumulated for them when they reach the specified age of majority in their state. This is usually either 18 or 21 — but depending on the custodial account type, could be as old as 25.

When they hit that age, they’ll be able to take over management of the assets you’ve created for them and transfer it to an account of their choosing.

Conclusion

We all go to sleep at night wanting what’s best for the people we care about. It doesn’t matter whether it’s your children, grandchildren, nieces, nephews, or even just your friends — if you could put yourself in a position to help secure their financial future, why wouldn’t you go for it?

Building generational wealth is the perfect way to do that. By investing now, you’ll be able to create a nest egg that future generations can then use to enjoy financial freedom.

You’ve just got to carefully consider your investment options — and if you’re looking for a flexible investment vehicle, you’ve really got to explore EarlyBird.

But don’t just take our word for it. Download the EarlyBird app now and discover how easy it is to build generational wealth for the people you love.

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