This article appears in the May 2017 edition of the Financial Post Magazine. Visit the iTunes store to download the iPad edition of this month’s issue.
Shirtsleeves-to-shirtsleeves in three generations is a common enough saying around the world, but it’s a bit more involved than you might believe. The numbers play out as follows: there is a 70% chance that financial wealth does not transfer from one generation to the next, which also means that there is roughly a 90% chance that wealth does not transfer to the third generation and a 97% chance it does not make it to the fourth.
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These figures seem depressing at the outset. Why is it so difficult to stay wealthy?
It’s getting harder and harder to pinpoint a dollar amount that says you’ve arrived in luxury land. Instead, in today’s crazy urban markets, geography may be the determining factor.
Let’s say that at the age of 20 you receive an inheritance from your grandfather in the amount of $10 million. Can’t complain about that. You approach your local bank and speak with an advisor who shows you the returns of various asset classes. But what stands out is the long-term return of U.S. (S&P 500) stocks at 10.6%. If you just compound the money at this rate over the next 50 years, you would have $1.5 billion to provide to your family’s next generation. Right? No. There are several things not accounted for.