Wealth Education

Less Common Financial Ideas

Empowering family members with advanced knowledge of how to build, maintain, and pass assets is a skill set rarely shared by older generations. Typically assets are passed without knowledge or wisdom as to how the assets were built, how to build more, and how to maintain them. The following ideas can potentially help extend the use of assets over multiple lifetimes, cultivate wealth where previously only opportunity had existed, and pass wealth on for the stewardship of future generations.

The Power of Exceptional Saving

If not yet financially independent, saving a large percentage of income may allow for a more rapid achievement of financial freedom. Industry norms are to save between 5% and 15% of one’s income. Higher percentages are not the typical, however, higher savings rates may result in accelerated wealth growth and earlier achievement of financial independence. Timelines to retirement and financial independence can potentially be shortened from 40 years to 10 years. A growing subculture that is focused on this goal is known as the “FIRE” movement, which stands for Financial Independence Retire Early.

https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

https://www.mrmoneymustache.com/2011/09/17/the-race-to-retirement-revisited/

http://earlyretirementextreme.com/how-i-became-financially-independent-in-5-years-part-i.html

Withdrawals Forever

Given a specific pool of stock and bond investments, attention to a withdrawal rate may allow the potential for money to be withdrawn over generations. Extensive past research points to historical investment withdrawal rates that leave the principal capital balance intact while allowing the use of a target amount for decades, all while matching future inflation rates. The principal or corpus can remain intact, grow in alignment with inflation, and allow a particular capital withdrawal rate potentially endlessly.

https://www.investopedia.com/terms/f/four-percent-rule.asp

Generational Retirement Planning

By investing small to medium amounts for a family member early in their life, the power of compound interest can be harnessed to effectively address that family member’s retirement needs, potentially relieving them of the burden of saving for their own retirement. While many fail to start saving on their own behalf until much later in life, a significant advantage is gained if someone else saves on their behalf while young. The early start can allow an investment account the benefit of extra decades of growth and compounding, making a significant difference in the eventual balance.

Teaching Younger Family Members to Invest for Their Children

A family culture of always teaching young adults about the power of early investing can encourage use of the tactic later in their life, thereby benefiting future generations. By using the insights of both early and regular investing, even young family members with limited income can make a significant difference in the lives of their children or other family members. If they start before or soon after the birth of a child, the additional time can maximize the investment on behalf of the child and future generations who follow them.

ROTH Building on Behalf of Younger Adults

As young adults acquire a first job and receive their first W2 income from employment, the typical tendency is to rapidly spend the money. Ordinary income from employment creates the opportunity for parents or family members to gift an amount equal to the young adult’s earnings into a ROTH IRA account (up to the annual ROTH limit). This tactic allows the benefit of tax sheltered long term growth of the funds during a phase of life where saving on the young adult’s own behalf isn’t typical.

Trusts for Passing Assets

There are many trust options available for passing assets to future generations. One type worth noting is the Crummey trust, which allows the use of the gift tax exemption initially (assuming funds are not withdrawn during an initial period of availability), and can then shelter funds from withdrawal for decades to come, including only allowing withdrawal after a set age. Such a structure might be used to pass funds tax free to a child with the final intent of withdrawal after the age of 50, for example. Another useful trust format is a Grantor Retained Annuity Trust, which can move wealth while avoiding most of the lifetime federal gift and estate tax exclusion.

https://www.investopedia.com/terms/g/grat.asp

https://www.kiplinger.com/retirement/types-of-trusts-for-high-net-worth-estates

Gifts Are Typically Without Taxes

Gifts to family members can be a useful tool for passing assets, whether money or property, because the gifts are typically not taxed until a very high threshold is reached. The donor’s lifetime gift exclusion is over $25 million per married couple as of 2023.

https://www.nerdwallet.com/article/taxes/gift-tax-rate

https://www.thebalancemoney.com/lifetime-exemption-from-federal-gift-taxes-3505634

Create a Family Investment Policy Statement

Creating a family investment policy statement can help keep the family focused upon investment goals and objectives while describing the strategies used to meet these objectives. The intention is to keep the family on financially target during potential short-term swings in the market and provide a baseline from which to monitor investment performance.

https://www.investopedia.com/terms/i/ips.asp