wealthy families blow their assets
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[May 06, 2014]
By Beth Pinsker
NEW YORK (Reuters)
— The basis of modern
financial management rests on the promise that you can pass along
what's left to future generations. Yet, the likelihood of your money
lasting is slim, and studies have pegged the "shirtsleeves to
shirtsleeves" failure rate at 90 percent by the third generation.
A new survey from Merrill Lynch of wealthy families who have more
than $5 million in investable assets attempts to find the obstacles
in the road to sustainable wealth. Desire is not the issue - some 70
percent of the 171 participants who were surveyed in December 2013
want their money to last beyond their lifetime, with 17 percent
effectively wanting it to last forever.
But almost everyone in that 70 percent cohort has an unreasonable
expectation of how much they can withdraw and still have the money
last - nearly a quarter would be bankrupt in their own lifetime if
they were left to spend at their desired rate. Another 20 percent
have no idea what level of distribution would keep them comfortable
forever. Only 16 percent correctly pegged a distribution rate in the
range of 1-3 percent per year for sustainable wealth.
Reuters sat down with the survey's co-author, Merrill Lynch
behavioral finance expert Michael Liersch, to find out what people
are doing to squander their wealth.
Q: Where do things start to go wrong for wealthy families?
A: People tend to be overly generous, so they end up over-giving to
family members or giving without accountability. What that ends up
doing is risking your financial future.
By the fourth or fifth generation you can go from four people to
over 100, and that will really affect the amount of money that can
be distributed to each individual. You have to be really explicit
about what you want the money to be used for.
Q: What should they do to figure out some parameters for themselves?
A: The natural starting point is: 'Am I going to be OK?'
Then you have to ask: What is the outcome you are looking for? The
important part is to articulate that on a piece of paper and
communicate it to each other in an objective way.
About 40 percent of individuals we surveyed say that it's never too
early to start discussions about finances with family, but far fewer
Q: Talking about money makes a lot of people even more
uncomfortable. How do you frame the discussion to avoid bad
A: The biggest mistake that people make is to confuse discussion
about wealth with dollar amounts - how much you are going to get or
not going to get.
For people who are second generation, there's an extreme burden
attached with the money. The biggest quote we hear is: 'I don't want
to be the one to mess it all up.'
To make that wealth last forever, you're probably going to need
future generations to replenish that wealth.
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Q: So what helps families talk to each other more effectively?
A: You can discuss making good decisions without talking about
A lot of people use the structure of save, spend, share, invest.
Think about the annual (tax) exclusion gift. You might have parents
who give a gift of $28,000 to each child and say they want the kids
to allocate that according to those four categories. That can start
building a sense of dialogue, especially in the sense of a family
meeting. Then you can start a coaching process.
Q: A lot of family rancor still comes down to who gets what. How do
you avoid that?
A: You can think of it in terms of equality, but you can't
confound it with fairness. If you have $10 million to split between
two children, what do you do?
The key here is that every family is different. You could give each
child a small amount to work with and try to understand what their
Maybe for one child, you give $5 million but there are more
parameters and restrictions. Or maybe you give more money to one
than you give to the other.
I wouldn't call it a test - it's just gathering information. The
moment you make it a test, it becomes intimidating. It's just about
seeing the behavior so you can communicate about it. Start the
dialogue, because collaboration is key.
(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance.
Editing by Arlene Getz and Eric Walsh)
(The author is a Reuters contributor. The opinions expressed are her
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