[dirtdobber]

I feel like this is almost always due to education around modern money systems.

If a child inherits $1 million from their parents (after taxes), they may feel rich, and they may try really hard to hold onto that money by saving and buying appreciating assets. In 10 years time that money might grow to $2 million. However, the buying power of $2 million is approximately equal to $1.5 million (3% inflation over 10 years). Couple that with a 20% tax on capital gains, and their real wealth increased by only 300K over 10 years after inflation. So while their nominal wealth seems to have doubled, their real wealth was only increasing by a modest 30K per year.

And this is all assuming that the person isn't spending any of that money. A different person might spend + invest and still have $1 million in their bank 10 years later... But this isn't the same $1 million they had 10 years ago --- adjusted for inflation they are 250K more poor

[blitzar]

> If a child inherits $1 million from their parents (after taxes)

Average life span of the parent is 76. Average age for the parent to have had a child 25.

The "child" inherits $1 million at the age of 51. At that stage behaviours are pretty well established.

[dirtdobber]

While this is true for many, it's worth noting that there's a growing trend of "giving while living" (especially for UHNWI and HNWI in the US).

This means that heirs of wealthy families are receiving portions of their inheritance often in their late 20s/early 30s.

[blitzar]

It's worth noting that there's a growing trend of "spending the kids inheritence" SKI parents - https://nypost.com/2024/07/15/lifestyle/im-spending-all-of-m...

[dirtdobber]

Haha oh geez. Some parents are just awful

[rufus_foreman]

>> I feel like this is almost always due to education around modern money systems.

I don't think it is a matter of education, at least for me it is instinctual. If I get a large amount of money, I am going to invest most of it and it would never occur to me to do otherwise. When I get a paycheck, I am going to invest part of that paycheck first before I spend any of it, and it would never occur to me to do otherwise. I did that when I was making minimum wage.

This wasn't taught, my parents did not do that and my siblings do not do that. I don't think it is inherited. The collector gene is, my father and grandfather had that gene and I think it is related, but the investor trait is something additional. I don't know where I came up with that. It has made things in my life hard in the short run sometimes and very easy in the long run.

You can educate people all you want, but when they get money, most of them are going to decide well I need this and I need that so I can't save any money this time. Maybe next paycheck. That's what my family did, my friends, my girlfriends.

There's a Bukowski poem he wrote about his father's investment advice:

"I can pay for this house in my lifetime,

then it's mine.

when I die I pass it on to you.

now in your lifetime you can acquire a house

and then you'll have two houses

and you'll pass those two houses on to your

son, and in his lifetime he acquires a house,

then when he dies, his son -

I get it, I said."

What did he do?

"I gambled and drank away the money."

[dirtdobber]

I have not heard of that poem, thanks for sharing!

With respect to education around money systems, I am referring more to (a) knowing that investing is necessary but insufficient and (b) understanding the main drivers (besides spending) of wealth loss: inflation and taxation.

It's hard (even for successful, intelligent people) to wrap their head around the fact that their $1m house that ballooned up to $2m over the last 25 years has in fact, lost value.

[PopAlongKid]

>It's hard (even for successful, intelligent people) to wrap their head around the fact that their $1m house that ballooned up to $2m over the last 25 years has in fact, lost value.

Anything to back that up? I spent some time searching online and every source strongly disagrees with your assessment of house prices vs. inflation. And the tax argument also fails here, since two people who own a home can exclude half a million realized gain from tax altogether, or leave it entirely tax free to heirs.

[dirtdobber]

Not saying a home isn't a good investment. But on average, home prices have risen 4% y.o.y. in the US. Inflation target is 2% but is much closer to 4%. If you sell your house for $1m more than you bought it for, you can exclude 500K from capital gains, but you're still paying cap gains on the other 500K.

Bottom line: assume a 1% real profit y.o.y. on your home, then factor in closing costs (8%), and. then cap. gains on the profit. You didn't make as much as you think.

[rufus_foreman]

That was an excerpt, full poem is at https://bukowskiforum.com/threads/father-who-art-in-heaven.8....

[PopAlongKid]

> they may try really hard to hold onto that money by saving and buying appreciating assets.[...] their real wealth was only increasing by a modest 30K per year.

Not to mention the initial $1M increase, which you conveniently did not. And that's $30K/year they did not have to work for and that they would not have otherwise, so what's disappointing about that?

You can avoid a lot of needless drama by simply stating that the real rate of return, after inflation, would be about 4%/year.

And your tax argument is weak. Just as the parents left tax-free money to them, they too can leave tax free money to heirs simply by dying. There is no need to pay any capital gains taxes while they are still alive, if they simply leave the money invested. Even if they need some of it for expenses, the tax hit is much, much lower if withdrawn in smaller annual amounts than in one giant lump sum after ten years.

[dirtdobber]

I don't understand your argument? You seem to be implying that if heirs don't withdraw any money then they will stay rich? Yes.

The point I was making is that most heirs might not fully understand tax implications, inflation, and that increases in nominal wealth != increases in real wealth. This all leads to generational wealth dying out, as well as for reasons mentioned by others in the thread.

[bamboozled]

What should they do ?

[creer]

There are two ways, I feel.

1. Spend it. In some cases that might be a fair direction. It's easy to spend 1 million. It's very hard to spend 1 billion though.

2. Seriously learn about money and investing. Really it's not impossible! But of course it's a field full of hype, hype vendors, counter-intuitive ideas, non-obvious ideas, "math" - some simple some seriously not, and nowadays very counter-narrative directions, etc... So that new fantastic books are still being written on the subject (by people who actually know what they are doing, as opposed to banking on a potential best seller.) Basically, that becomes a serious endeavor - which few people are ready for.

[horns4lyfe]

A truly impressive non-answer.

[bamboozled]

Yeah, I'd personally like to here why passive investing 1~6 million dollars would be a bad idea, you might not get bill gates rich but I can't see it going horrible either. Sure you'd likely want to take some risks but it feels like you'd somehow remain well off so long as you kept reinvesting some of the profits you make.

[thephyber]

> but I can't see it going horrible either.

Any type of investing can do horrible. Examples: you trust a financial expert who swindles you, you invest everything in a dying company/industry/company/asset class, you don’t rebalance or diversify, you don’t take advantage of accounting or tax law shelters.

You comment seems to imply that you are making unstated assumptions.

[creer]

Pretty good illustration, thanks.

You mention "passive investing" and imho that's a good answer if you want minimum involvement of either yourself or a manager (say because you don't trust them - and you shouldn't).

But then in the same breath you mention "Sure you'd likely want to take some risks" and THAT is not an answer to the same parameters. Why? How much? What kind? With what personal involvement? Etc. Elsewhere you hear "multi-family housing", or "chain of laundromats". All these are one-sentence answers which come either from some random book (which might be very exciting, and not an investing education), or from the experience of someone (who may be lucky, or may be an expert in laundromat operation, perhaps both. May even have written a book or a blog.)

But wait, why is "passive investing" such a good answer, for that very specific circumstance? Because everyone says so? (except the people who say "real estate") Because I say so? So actually "passive investing" is the same kind of answer as "laundromats". It's a lazy pick, out of what floats around HN. I feel it's a fine answer IF minimal management is the priority. And IF you are going to say "Sure you'd likely want to take some risks", then it probably isn't.

And IF "passive investing" only, then how much do you withdraw? Why? "Surely you can't be too wrong if you withdraw 1% a year"? Really? But what if withdrawing 4%, or 8% meant a significant improvement to your life?

And let's question "minimum involvement"? Why is that a priority? Because you don't trust yourself or a manager? But shouldn't there be more considerations? Like how much spending would significantly improve your life? Like are you the kind that always worries about paying a mortgage?

To summarize: these are "shoot from the hip" answers which consider really very little of what deserves to be considered. Why should it considered? Well, How many work days - that is how much of your finite lifetime - does it take for you to save free and clear 1 million? Now that we have this number, how much does the 1 million deserve? I'm not trying to send people in a tailspin of decision paralysis. I'm pointing out that investing is a bit more complicated than "laundromats". I'm also not recommending that you become a professional fund manager while you are at it. There are extremes and the optimum (thinking and learning time) is nowhere near "passive investing"'s zero.

(And the context here is family wealth disappearing. If you are 9 years old, say, nobody is asking you.)

[dirtdobber]

Spend no more than 1% of their investment per year and invest the rest. This means that if you inherit $10m (after taxes), you should really only be withdrawing about 100K (before taxes). On the remaining wealth, you hope to earn 7+% year over year to beat inflation and grow your *real* net worth over time.

Inflation is necessary, and a low, predictable inflation rate is good for the economy. But it's still a wealth tax of the worst kind -- it's essentially a flat tax on everyone regardless of their level of wealth.

Remember, a government with $35T in debt can't possibly raise that much money from taxes; 3 out of every 4 dollars we pay in income taxes already goes to interest payments on that debt alone. The government will instead inflate the debt away by paying it back with future dollars that are worth less.

Many high net worth individuals are aware of this fact, but blindly giving heirs millions of dollars and not educating them about the money system will inevitably lead to poor outcomes.