Financial Planning

Knowledge Is Power: The Great Wealth Transfer & Financial Education

In 1973, just shy of the 100th anniversary of his death, descendants of Cornelius (“the Commodore”) Vanderbilt gathered at Vanderbilt University in Nashville for their first-ever family reunion. When the Commodore died in 1877 he was the richest man in the world. His fortune estimated to be equivalent $150 to $200 billion in today’s dollars. And yet, at that first reunion in 1973, just 96 years from the apex of the Vanderbilt fortune, there was not a single millionaire among his 120 descendants.*

The story of how one of the great fortunes in world history was squandered does indeed fill a book, Fortune’s Children: The Fall of the House of Vanderbilt by Arthur Vanderbilt II.  While the mistakes they made are myriad and diverse, a clear trend emerges: the Vanderbilts were really bad at talking about money. They also made little attempt to educate themselves (or hire someone) to help them pull out of their downward financial spiral.

While the magnitude of their failure is unmatched, the outline of the Vanderbilt story is quite common. According to a 2013 article in The Wall Street Journal, 70% of wealthy families lose their wealth by the second generation.

In the past this may have been a concern confined to the ultra-wealthy, but Boomers, Gen Xers and millennials would be wise to learn from the Vanderbilts’ mistakes. The past 40 years have seen the rise of the middle-class millionaire thanks to increasing real estate values, the explosion of the employer-sponsored retirement plan, and strong technological, economic, and stock market gains. These and other developments mean that more Americans than ever will receive a meaningful inheritance from their parents.

 

According to Cerulli Associates, the Silent Generation and the Baby Boomers may transfer as much as $68 trillion to Gen Xers, millennials, and Gen Z over the next 25 years, in what is being dubbed “The Great Wealth Transfer.” Whether or not this inheritance is squandered like the Vanderbilts, or compounded for the benefit of future generations, depends in large part on how well prepared they are to receive it.

 

How can we put the next generation in position to handle the responsibility of the legacy they stand to inherit?  While many things can be self-taught, we tend to gain wisdom from our parents, our schools, and our mentors or coaches.

Historically, financial literacy has not been emphasized in most U.S. school systems. There is a push to change this, with school systems looking to integrate financial literacy programs into the curriculum, but it will take a while for these efforts to take root. Thus, most behaviors and attitudes towards money, at least for current younger adults, will come from their families and their mentors.

Parents and grandparents can have the most impact by focusing on their principles and values. The specific ways that Cornelius Vanderbilt built and maintained his fortune would have been of almost no use to his children and grandchildren. From starting as ferry captain in New York Harbor, to becoming a steamboat entrepreneur, to cornering the railroad market, the tactics Vanderbilt used were out-of-date, illegal, or irrelevant by the time of his death.

Similarly, the specifics of how today’s retirees built and maintained their retirement portfolios may not apply to the next generation. Many of today’s retirees first began investing before the Roth IRA existed, when 401k plans were in their infancy, interest rates on safe Treasury bonds were north of 8%, and a stock or bond had to be bought with a phone call to a broker.

The mechanics of that experience may not be useful to the next generation, but the history and concepts are.

The catch is that family money talks can be hard. Kathleen Burns Kingsbury, author of Breaking Money Silence, shared results from a survey that revealed that 44% of Americans find it more difficult to talk about money than to talk about death, politics, or religion. These thorny conversations don’t come naturally to most of us, but there’s a lot on the line.  $68 trillion, to be exact.

Grounding the conversation in something tangible helps place money in the appropriate context.  This can start with basic family history of where parents and grandparents came from and what they did for a living, how they bought their home, or paid for education.

From here you can build to money basics – how you thought about spending, saving, generosity, and debt. This conversation may happen at any age, but it can start when kids are young. Our favorite book on this topic is The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money by Ron Lieber.

As they move into adulthood, there’s usually no urgency to share specific numbers with children in their twenties.  But it is a good time to start a conversation about your basic financial framework and estate plan, particularly if the children may have a role to play as trustee or executor.

Once children reach maturity, and perhaps are starting families of their own, it may be a good time to discuss your plans for the future in greater detail. This can start with your intentions for inheritance, help with a home purchase, or support for grandchildren.

By their 40’s and into their 50s, it is important for children to have some detailed knowledge about the family finances. The less they know, the greater the anxiety they have about what the future holds for their parents, and whether or not they may be called to help the parents financially down the road. This is the time to educate them on your estate plan, portfolio and investment philosophy, and your expectations.

There is no one size fits all answer for what to share when. The most common concern is that children, particularly earlier in life, will become entitled, and that withholding information will help build a motivated and financially savvy adult. But the unintended consequence is that those who had limited communication with their parents about money “later in life feel ‘clueless,’ as if they don’t truly understand how…money management works.” (The Wall Street Journal, 2/2/15).

Often these conversations are put off or avoided because of the family dynamics at play. In other cases, you may not feel qualified to pass on the “right” lessons to the next generation.

This is where a mentor or financial planner, can step in. As planners, we have a firsthand view of the many mistakes that are made with money. More importantly, we see what works, and what a successful financial transition looks like. One of our most rewarding tasks is completing the successful transition of a long-time client’s assets to their heirs, and helping the next generation become responsible steward for this legacy in the future.

The path to a secure retirement and financial future is different for everyone, and what worked for one generation may not be the appropriate path for the next. The legacy that will be handed down to future generations represents a great opportunity and a tremendous responsibility. The time to start preparing them is now.

*At least one Vanderbilt has since rebuilt a portion of the family fortune, as CNN anchor Anderson Cooper, great-great-great-grandson of Cornelius Vanderbilt, is estimated to have a net worth of $200 million.

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