For example, right now I am doing better financially than my parents. That is partially because I had help getting my first home loan and I had help paying for college. I will inherit some money. My kids will do even better. This is in sharp contrast to when Grandpa came over from Poland dirt poor.
What I’m wanting to discuss is the accumulation of family wealth so the next generation can get a little boost from their family. How many generations before you start seeing that kick in? I’m not talking about the mega rich who start getting million dollar allowances from the family trust fund once they hit 21. I’m just talking about how one just doesnt have to start out from scratch anymore plus a little extra.
So for example, let’s say you have 2 people. Both making say $50,000 a year. Both work equally hard.
Person 1, well thats all they have. They had to pay for college (and have outstanding loans) and are struggling to fund their first mortgage. Person 1 has little money to pay for luxuries and has less money to put towards retirement.
Person 2, well their parents paid for college or alot of it so they are college debt free. Parents helped by buying them a car and giving money for their first down payment on a house. They can afford to be putting 10% into a retirement fund.
My experience is 3 generations to get to this point.
Home ownership is the be-all and end-all of generational wealth transfers, for the most part. As a rule, most people don’t have the money to provide much additional assistance to adult children. But when generation 2 inherits generation 1’s house, it’s an instant college fund (or whatever) for generation 3.
I think any comparison would need some sort of control to account for family size, as inheritances are normally (though not necessarily) evenly split between surviving children or grandchildren. For instance, my father came from a large family and when his dad passed the estate was divided among my dad and six other surviving siblings. So while any inheritance is a step up in life, being an only child would reduce the number of generations by a considerable amount.
And the OP also assumes that 1) there is an initial generation that is able to amass any amount of wealth that can be passed on, and 2) that the follow on generations are able to take advantage of their, uh, advantage, and continue the accumulation of wealth. In the instances where that actually does happen, yes, probably three generations is enough meet the standards the OP set. It would be interesting to figure out how often that works out, instead of the second and third generations being unable to continue what the first generation started. Because you know, people are people and stuff happens.
Yes, well, the general idea is that if you have more than one child, you hope that at least one will do better and if the others fall by the wayside, well, that’s life.
I’m person 2, more or less, but it didn’t take three generations. My parents paid a good portion of my college (and I paid the rest, so I graduated debt-free); they also gave me my first car, and provided a large part of the downpayment for my first house. I don’t know for certain, but I don’t believe my parents received any of those things when they were starting out; they both came from large blue-collar families, not much money to spare.
So depending on how you’re counting, is that one generation, or two generations?
I know this has been true in the past, and maybe it still is. But I’m feeling doubtful it will continue, given the fact that so many Boomers and Gen Xers don’t have much of anything saved for retirement and are carrying high levels of debt and also given the fact that homebuyers now don’t seem all that interested in buying suburban McMansions.
Families pass on more than their wealth. They also pass on the habits that lead to wealth, or the lack thereof. A lot of poor people are poor because they don’t know how to accumulate wealth, and they don’t know that because their parents didn’t know it either and so never taught them, and so on back through the generations.
It’s always been my theory (unproved empirically) that a fortune tends to last through three generations. The first one earns it, the second one rides the crest of the wave, and the third one pisses it away.
As people live longer and the cost of staying alive to a very old age increases the amount of inheritance will decrease in the lower half of the economic range. At the same time there is an increase in savings for many so the upper half may be leaving even greater wealth to their heirs. We may see an inheritance disparity that matches the income disparity that’s evident now.
True. But the Boomers and GenXers who inherit homes are invariably going to be in better shape (and by extension, their kids will too) financially.
If you look at the paper I linked to, it explains that home ownership tends to result in marginal savings over renting over the long term. However, owning a home functions as a sort of forced investment plan. Even if you don’t have good financial discipline, you will “invest” in your home since you’ll be foreclosed on otherwise.
Renters could leave similar generational wealth behind by investing the money they save over buying a home, but people don’t work like that. They spend the money instead of banking it.
There is a saying for that, shirtsleeves to shirtsleeves in 3 generations. Supposedly 90% of the original wealth is gone by the time the grandchildren die.
I’d say based on immigrant families, 2 to 3 generations before you are able to pass down wealth. Some first generation immigrants get wealthy, but many do not. However their kids can own homes and be independent enough to help their children.
My father’s parents were immigrants who spoke only broken English and were very poor. My father was US born, but we were distinctly lower middle class and there was no money for college and I got no scholarships. But for a stroke of luck, I likely would have worked to scrape together enough for a year at Drexel, after which money earned in their co-op program would have provided the rest. I probably would have become a chem engineer and never left the Philadelphia area.
Anyway, it turned out differently and I don’t think it an exaggeration to put myself in the upper middle class. Now of my kids, one of them is a Microsoft millionaire, the second one has a family income of probably $350,000 (his wife is a family doctor) and is distinctly better off than I ever did. My daughter is the least well off, but I am pretty sure that her family income is over $200,000.
More and more people who might have been in line for a modest inheritance will now get nothing, as senios are signing over their entire estate and future income to a guaranteed lifetime in a nursing home. The aggregate amount might not be enough to skew the statistics much, but will cut off a lot of people at the low end, who might have otherwise gotten four or maybe five figures.
The mantra my father taught me decades ago was that it took 3 generations to be rich and one to lose it.
This agrees with your assessment.
I don’t think he made it up, I think it was a ‘proverbial’ statement that he himself learned many years ago.
Here’s something…that isn’t quite what I was saying. It was 3 generations for the entire cycle from ‘shirtsleeves to shirtsleeves’
Family wealth can be built in a generation or two. True rags to riches stories are fairly rare, but rags -> middle class -> titan of industry is plenty common. Many of the richest people in the world had middle-class beginnings: Bezos, Zuckerberg, Buffet.
Another interesting question is how long does it take the effects of family wealth to dissipate. The common “three generation” cycle is not supported by the data. It turns out it takes 300-500 years for the effects of family wealth to go away.
Yeah, the kid of a rich parent might coast, and their kid might suffer. But it turns out that, statistically, if your g-g-g-g-g-g-grandfather came from aristocratic wealth, you’re likely to do better economically that someone who came from peasant stock.
Is this not in part the difference between being rich and being wealthy? If your family is wealthy, you can stand a bad generation or two; a merely rich family will sink. I would also suggest that this is also to do with the wealthy having sufficient children that at least one can succeed.