The basis of modern financial management rests on the promise that you can pass along what's left to future generations. Yet, the likelihood of your money lasting is slim, and studies have pegged the "shirtsleeves to shirtsleeves" failure rate at 90 percent by the third generation.
A new survey from Merrill Lynch of wealthy families who have more than $5 million in investable assets attempts to find the obstacles in the road to sustainable wealth. Desire is not the issue - some 70 percent of the 171 participants who were surveyed in December 2013 want their money to last beyond their lifetime, with 17 percent effectively wanting it to last forever.
But almost everyone in that 70 percent cohort has an unreasonable expectation of how much they can withdraw and still have the money last - nearly a quarter would be bankrupt in their own lifetime if they were left to spend at their desired rate. Another 20 percent have no idea what level of distribution would keep them comfortable forever. Only 16 percent correctly pegged a distribution rate in the range of 1-3 percent per year for sustainable wealth.
Reuters sat down with the survey's co-author, Merrill Lynch behavioral finance expert Michael Liersch, to find out what people are doing to squander their wealth.
Q: Where do things start to go wrong for wealthy families?
A: People tend to be overly generous, so they end up over-giving to family members or giving without accountability. What that ends up doing is risking your financial future.
By the fourth or fifth generation you can go from four people to over 100, and that will really affect the amount of money that can be distributed to each individual. You have to be really explicit about what you want the money to be used for.
Q: What should they do to figure out some parameters for themselves?
A: The natural starting point is: 'Am I going to be OK?'
Then you have to ask: What is the outcome you are looking for? The important part is to articulate that on a piece of paper and communicate it to each other in an objective way.
About 40 percent of individuals we surveyed say that it's never too early to start discussions about finances with family, but far fewer do it.
Q: Talking about money makes a lot of people even more uncomfortable. How do you frame the discussion to avoid bad feelings?
A: The biggest mistake that people make is to confuse discussion about wealth with dollar amounts - how much you are going to get or not going to get.
For people who are second generation, there's an extreme burden attached with the money. The biggest quote we hear is: 'I don't want to be the one to mess it all up.'
To make that wealth last forever, you're probably going to need future generations to replenish that wealth.
Q: So what helps families talk to each other more effectively?
A: You can discuss making good decisions without talking about dollar amounts.
A lot of people use the structure of save, spend, share, invest. Think about the annual (tax) exclusion gift. You might have parents who give a gift of $28,000 to each child and say they want the kids to allocate that according to those four categories. That can start building a sense of dialogue, especially in the sense of a family meeting. Then you can start a coaching process.
Q: A lot of family rancor still comes down to who gets what. How do you avoid that?
A: You can think of it in terms of equality, but you can't confound it with fairness. If you have $10 million to split between two children, what do you do?
The key here is that every family is different. You could give each child a small amount to work with and try to understand what their behaviors are.
Maybe for one child, you give $5 million but there are more parameters and restrictions. Or maybe you give more money to one than you give to the other.
I wouldn't call it a test - it's just gathering information. The moment you make it a test, it becomes intimidating. It's just about seeing the behavior so you can communicate about it. Start the dialogue, because collaboration is key.