Creating Generational Millionaires

When answering questions about creating generational wealth, one key thought comes to mind. It’s not a trust fund. It’s not an inheritance. It’s knowledge.

That’s right. Generational wealth is inherited between the ears. Allow me to explain. Forbes, among other sources, claims about 70% of the time, family wealth is lost by the second generation. And 90% of the time, it’s gone by the third generation.

This supports the claim that a windfall income or monetary transfer is not a sustainable means to create generational wealth.

My earnings, investments, and wealth is only a tool for me (and Mrs. TFC of course). I’ll show you how we plan to create generational wealth and make each child a millionaire with a high school graduation present. First things first…

Reasons for Lost Wealth:

Wealth could easily be halved during the transfer process. The bearer of wealth needs to ensure estate planning to minimize taxation and other factors that will erode the inheritance. Trusts are a solid way to avoid this issue. Tough to maintain when you lose 50% from the start.

Secondly, money never transfers well. I have been involved in a few wealth transfers and there is always some degree of conflict. Even when all receiving parties are financially well off, there are always discrepancies. Estate planning and clear documentation are essential.

Thirdly, my children did not earn their inheritance. They won the genetic lottery. They do not possess the attributes that allow(ed) me to create wealth. Hopefully for the better. They will have a different upbringing. They will likely pursue different careers. They will grow up in a different era.

Fourthly, entitlement exists. As with reason #3, they did not earn the money used to fund their upbringing. For them to uphold the same standard of living, they will need a job or career that pays well. If they want to uphold the same standard of living and invest for the future, they will need to have a career that pays 99th percentile well or become an entrepreneur with a grand idea.

Fifthly, my children will think about money differently than me. Hopefully for the better. My life lessons molded my viewpoints. Their different upbringing will mold a different insight.

Monetary Transfers:

I’ll emphasize, my earnings are not for my children. My earnings are for the following in no particular order of importance:

• Support the TFC family

• To Enjoy

• To Give Away

Seriously, I would rather set up a non-profit and give my career earnings to a worthy organization instead of pass millions to each of my children to be under appreciated and statistically squandered.

TFC 3-Part Plan:

Part 1 involves a 529 Plan at birth. This is important for a few reasons. Tax-free growth for education. Great.

Secondly, Secure Act 2.0 allows unused 529 dollars to undergo a Roth IRA conversion if the plan has been active for 15 years. Well, start that time clock, even if the initial contribution is just $100.

Compounding interest is your friend. We plan on frontloading a 529 plan with $10,000 per year for 3 years. Yep, $30,000 by age 3 per child. This money goes into a broad market index fund.

Assuming an 8% annual return, the 529 balance grows to $100,000 at age 18. I realize that’s not enough to pay for school, but that’s what we want. I paid for both of my degrees. Mrs. TFC paid for both of her degrees. Skin in the game.

No college, no problem. Roll the money into a Roth IRA. The limit is $35,000, but will surely change over the next 15-20 years.

Tech school is surely paid for with $100,000. An in-state university will probably cost more than $100,000, but should be manageable with scholarships and summer jobs. If Little Miss TFC wants an expensive degree, that’s on her. That’s beyond what I’m willing to contribute.

If TFC children want to spend beyond their 529, that’s where part 2 comes in.

Part 2 involves knowledge acquisition. This deserves its own post, so I’ll keep it short. Mrs. TFC and I agree that seeing a child put forth effort to acquire something they want is ultimately beneficial. Kids care for items they worked to purchase far more than something they received.

There will be no allowance. There will be no money for chores. Chores are the cost for living under the TFC roof and eating TFC food. Helping beyond maintenance of the house will earn spending money.

Data supports kids having chores produces many benefits. The same can be said for employment. This includes jobs during high school and college. Even entry level jobs are great for accountability, teamwork, and communication. It’s a taste of the real world. And it’s a great segway into part 3.

Part 3 involves Roth IRA contributions. The mightiest of all retirement contributions. For one to contribute to a Roth IRA, they must have earned income. The government wants you to have earned $7,000 so they can ensure the money is taxed BEFORE giving you the Roth benefit.

$7,000 of taxable, earned income is doable. A high school job paying $15/hr at 40 hours per week is $600 weekly. 12 weeks of Summer is $7,200.

The government doesn’t care who contributes to the Roth IRA, ONLY that the holder of the Roth IRA earned greater than or equal to the amount contributed. So, I’ll contributes what my child EARNS. They don’t need to contribute anything, just qualify for the Roth IRA.

Let’s say Little Miss TFC earns $10,000. I contribute $10,000 (up to the max annual limit) to her Roth IRA.

$7,000 Annual Max * 4 Years = $28,000

Assuming 8% annual growth, this $28,000 high school graduation present turns into $1.25M at age 65. Remember, that’s $1.25M ROTH DOLLARS with no additional contributions. No taxes owed at the time of withdrawal. Cold hard cash money.

I understand $1.25M won’t be crazy impactful 50, 60, or 70 years from now, but it’s another tax free $1M. It’s a major boost from the starting line without handing over the keys to the castle.

The Roth IRA limit will likely be far higher when Little Miss TFC reaches high school. Maybe $10,000 per year. This means the total will be far higher at retirement. Maybe $1.5M. Maybe $2M+.

Caveat

This doesn’t work without YOU being financially well off. My online course covers 529s, UGMA/UTMAs, custodial accounts among other ways to set up generational wealth, but emphasizes to focus on YOUR finances first.

Every child receiving $30,000 in their 529 is $100,000 for them at age 18 instead of $300,000 for me at age 60. Every $28,000 Roth IRA contribution is $150,000 for me at age 60. That’s $450,000+ of wealth I’m giving away PER CHILD.

If your rubber duckies are not aligned, you can’t afford to do this.

Bonus Caveat

It’s quite the feeling when you can approach your parents, request to not be named in their inheritance, and actually mean it. When you genuinely don’t need their money. It’s their earnings, their retirement, theirs to enjoy, and theirs to give away. Don’t feel any obligation to save some for me.

I said if you are going to be stubborn and not spend/donate every last $1, then at least skip a generation. Gift it to the grandkids.

I hope that’s a proud moment for parents knowing they raised a child who is surviving in this crazy world. They successfully passed along knowledge so their child could trade time and skillset for the universal currency we call money. Not only the knowledge to acquire, but the knowledge to maintain and grow their income and net worth. Coast FI at age 30, FI at age 33 type knowledge.

That’s generational wealth.