6 Best Ways the Upper Class Can Build Generational Wealth in These 3 Major Cities
Have you ever heard the adage “shirtsleeves to shirtsleeves in three generations?” According to Jon Ekoniak, CFP, managing partner, and senior wealth advisor at Bordeaux Wealth Advisors, this is a reference to the inability of successive generations to manage the wealth of their forefathers. Within three cycles, that wealth is squandered, which puts an end to generational wealth.
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When it comes to building generational wealth in major cities like New York, Los Angeles or Miami, there are no cheat codes for success. While there are some strategic moves you can make which are specific to high-value cities, the upper class must prioritize establishing a proper foundation to build and protect their wealth. Pay attention to these critical aspects along the journey to building generational wealth.
Make Use of All Available Pre-Tax Deductions
Brian Kaplan, CFP and senior vice president at Lenox Advisors, said the biggest barrier to building wealth in cities like NYC, LA and Miami is the high cost of living. This cost balances the higher taxes which come with having a higher income. As a result, affording a nice standard of living conflicts with lower disposable after-tax income.
The first thing the upper class needs to do is make use of all available pre-tax deductions. This includes maxing out a 401(k) plan, HSA contribution and 529 plans, if education for the next generation is a priority. Kaplan also recommends maxing out any other plans offered, including a Defined Contribution and Defined Benefit for Deferred Comp.
“This will force savings without the ability to spend those dollars and with relatively little work aside from setting up,” said Kaplan.
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Set Up a Backdoor Roth IRA
If you’ve met the pre-tax deductions and are eligible to do so, Kaplan recommends setting up a Backdoor Roth IRA.
What’s a Backdoor Roth IRA? According to Vanguard, high-income earners which can’t contribute to a Roth IRA due to having an income above certain limits may instead contribute to a traditional IRA and convert it to a Roth.
Another move Kaplan recommends making after a Backdoor Roth IRA has been set up is setting aside a small allocation to purchase company stock, especially if there’s a discount to do so. Prioritizing both of these plans, Kaplan said, will enforce the forced savings mantra.
“All of these accounts should be invested in a portfolio that adjusts for the individual’s risk tolerance,” said Kaplan. “I would recommend a target-date fund to keep it simple, which will be diversified and adjust along a glide path as one gets closer to retirement.”
Make a First Big Real Estate Purchase
While real estate is not a requirement to build generational wealth, it may make sense to purchase real estate in cities like New York, Los Angeles and Miami.
“Up to $750,000 of a mortgage balance is deductible each year, as well as property taxes up to $10,000 annually,” said Kaplan.
Obtain a Well-Structured Life Insurance Policy
There are several benefits afforded to the upper class with a well-structured life insurance policy.
Kaplan said the assets inside these policies are free of taxation. Additionally, those who secure a life insurance policy at a younger age find that the net after-tax return is often on par with other riskier assets while having the benefit of the insurance. Younger members of the upper class will utilize these policies as another retirement vehicle.
“As wealth builds and generational, legacy planning becomes more important, having these policies owned by an Irrevocable Trust will shield the policies from estate taxes while offering the ability to compound wealth tax-free for multiple decades,” said Kaplan.
Keep Up With Family Legacy Planning
We started this article with an adage about generational wealth being lost as quickly as within three generations. There’s a grain of truth to it, unfortunately. Krysta Dos Santos, CFP at GenTrust, said studies conducted by Forbes show that 90% of affluent families do lose their wealth by the third generation.
To defy this trend, Dos Santos said the upper class needs to consider implementing proactive measures to ensure a successful multigenerational wealth transfer.
“Family legacy planning is an ongoing effort that requires embracing the journey to solidify a family’s financial legacy,” said Dos Santos.
Here are a few of Dos Santos’ suggestions for obvious, and overlooked, steps which need to be taken:
Obvious Family Legacy Planning Steps
Collaborate with advisers to establish a sound financial plan.
Partner with attorneys to draft a comprehensive estate plan.
Organize crucial information.
Family Legacy Planning Considerations To Avoid Overlooking
Clear communication
Regular family meetings
Creating a family mission statement
Building financial acumen
Educate the Younger Generation
Ekoniak helps support many wealthy families in cities including New York and Los Angeles. The best way to protect and ensure generational wealth lasts several lifetimes is not necessarily by purchasing or making a specific investment. Rather, Ekoniak believes this is best done through education.
The simplest way to begin educating younger generations about money before they receive it can start with the value of a dollar. Ekoniak added this education may also include the vision for what those assets can and should be used for as well as ways to ensure their growth over the longer term.
Investments for building generational wealth, like real estate, have risks. Ekoniak said part of this education is learning how to identify those risks, so the next generation makes wise investment decisions.
And if the family does not plan to educate younger generations or lacks the ability to do it properly? Ekoniak recommends they work with a wealth advisor who can play that role.
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