Tips for Building Generational Wealth

Jun 17, 2022


The concept of creating a legacy of wealth that can be sustained through multiple generations can seem like a formidable endeavor when you’re focused on shorter-term financial goals as well as planning for your own retirement. But you don’t have to inherit a fortune or be fabulously rich during your lifetime for your heirs to benefit from the financial security you’re building today. Essentially, any way that you can contribute to your loved ones’ financial well-being once you are deceased can positively impact their quality of life, ease major burdens and help set them up for greater success. The following strategies can be highly effective in ensuring that you leave a financial legacy that benefits your heirs long after you’re gone:

Invest regularly in the stock market over a long-time horizon

One of the most powerful ways to create generational wealth is by investing in the stock market as early as possible with the understanding that you will allow it to compound and grow for many decades. As The Ways to Wealth points out, a lack of comprehension about how the exponential function operates has been described as a major shortcoming of humanity. On the other hand, the illustrious investor, business magnate,  and philanthropist Warren Buffett is one individual who fully grasps this concept and has excelled at putting it to work. A large part of Warren Buffett’s success has been his commitment to consistently investing for not just a decade or so, but over three-quarters of a century.

Investing in a low-cost index fund that tracks the S&P 500 or total stock market and leaving the money in it to grow over time is a great way to start creating the foundation for wealth that can be transferred to successive generations. What’s more, user-friendly investment apps have made this increasingly easy to do by allowing you to automate transactions and enabling you to start with very little resources.

Get into the real estate game

It probably won’t surprise you that investing in real estate is still touted as a great strategy for maximizing your net worth and preserving it for your loved ones. As most of us know, assets of property are likely to appreciate in value over time, and can provide steady cash flow from rental income. But you don’t need to large portfolio to start earning income from real estate. You can benefit from something as simple as renting a room in your home. You might also opt to buy a property with other investors that you could divide into multiple units and rent out through a hospitality marketplace like Airbnb. One of the major advantages of holding assets like real estate is the 1031 tax-deferred exchange, which allows you to temporarily avoid capital gain taxes on the sale of an investment or business property by replacing it with a like-kind property. As Yahoo! Finance puts it, these exchanges can allow for you to continually extend your tax bill on the profit from the sale of a property as long as you are alive. It’s important to be aware that the 1031 exchange can be complex. But it’s a shrewd investment method that is also used as a tax and estate planning tool. According to The Balance, it’s a key tactic behind the success of many major players in finance and real estate.

Create a passive income stream

 Passive income can be highly lucrative, and by definition, it should take up much less of your ongoing energy than it takes to acquire the money you receive when you trade time for money, as in a job or side business. The popular personal finance and education platform Clever Girl Finance notes that the average millionaire has seven streams of income. Just a few examples of passive income include money you receive from rental property, peer-to-peer lending, book royalties and participation in affiliate marketing. What’s essential is that after the initial setup, you earn money from your assets without much effort. By helping you to build wealth and enhance cash flow, passive income can be an important component for financial stability that can benefit your family for generations to come. For advice on where to start, check out “Passive Income: 10 Ways to Make Money While You Sleep” from NerdWallet.

Get life insurance

Another excellent approach to safeguarding your family’s financial security is to buy a life insurance policy. A life insurance policy provides a tax-free lump sum cash payout to your loved ones if you die unexpectedly. Taking this step to protect your family can go a long way toward preventing financial hardship for your loved ones, who will have already been forced to deal with the unexpected loss of you. It can be used by your family for any expense.

Not only does life insurance protect your family’s financial health in the event of your untimely death, but it can also provide important benefits to you while you are alive if you purchase options that provide coverage for unique situations. For example, you might add on riders for disability income and long-term care needs if you fall ill. Find a succinct and helpful overview on life insurance at Policygenius. In addition, you can get access to a free course on ““Everything You Need to Know About Life Insurance” here.

Take advantage of tax-saving strategies

Taking steps to minimize your tax burden can have a tremendous impact on your ability to grow and maintain your assets so that they can be transferred to younger generations. Given that taxes are your single largest expense, it makes good sense to take advantage of a qualified retirement plan like a 401 (k) and/or tax-advantaged individual retirement accounts like a ROTH IRA, which enables you to receive tax-free income during your retirement as well as tax-free earnings growth.

A ROTH IRA allows you to be taxed at a lower rate today than you would expect to pay in the future, when the value of your assets has grown. And as The Ways to Wealth points out, your heirs can make tax-free withdrawals for a five-year period from a ROTH IRA inherited from you. The independent personal finance website also emphasizes that in terms of results, you’ll generally do much better to concentrate on efficient tax planning rather than trying to outperform the market by crafting the ideal asset allocation. However, keep in mind that a subject as important (and often complex) as tax planning is best handled by consulting a qualified professional.

Put an estate plan in place

When it comes to preserving your legacy for the next generation, it is critical to establish an estate plan that clearly documents your wishes and will allow for a smooth transition of assets. Moreover, it’s highly advisable that you work with an expert with deep knowledge in this area, such as a trust and estate attorney who specializes in drafting wills and trusts, granting powers of attorney and tax planning. A proper estate plan will safeguard your wealth for your children and/or other heirs after your death, and protect your money and assets if you become incapacitated.

Help fund your child’s education

Finally, whatever may come of other assets you leave to your children, their education is something that they will keep throughout their lives. When you consider that the average student loan debt in 2022 exceeds $37,000 and that this number is likely to only increase in the near future, it stands to reason that any help you can provide to defray the costs of higher education is of major value in terms of an investment in your child’s financial future.

While the average student loan payment may stand at $393/month, you can easily find someone in middle age who is paying upwards of $800/month from a student loan bill that has climbed to upwards of $90,000 over the years from principal and interest. Accordingly, helping someone clear this obstacle while they’re young can be a springboard to financial health, in the near-term and even decades down the road. To start building funds for higher education, you might consider a specialized, tax-advantaged savings vehicle such as a 529 Plan, a ROTH IRA, or even  a custodial investment account that you can control until your children reach the age of majority. Find plenty of helpful advice on this topic in “8 Ways to Save for Your Child’s Education” from U.S. News & World Report

The Police Credit Union does not provide Tax, Legal or Accounting advice. Members should seek their own professional counsel in these matters.

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