Why Wealth Doesn't Always Survive Three Generations
"I manage my son's money for him also. Young people nowadays not interested in this sort of things. They are too busy with work also. So I just tell him to pass me his savings and I put inside the fixed deposit for him."
"He is a good boy. He saves a lot. Don't anyhow spend. But all his money just sit in the bank. So I tell him, transfer to me I set up the savings for him. It's in a joint account with both of our names."
This was one conversation I had with one of my client. Interestingly, I had multiple similar conversations like that with many loving parents in their 60s and 70s.
One told me they just made the downpayment for their kid's condo.
"Might as well because there's money sitting around and interest rates are so low. Eventually it'll be their money anyway..."
Every parent does this with loving intentions. In their minds, they are passing down their assets to the next generation and securing their kids future for them. Here's the part many of these parents haven't considered...
I have my fair share of clients who are beneficiaries of such gestures too. I remember one particular conversation...
"We are very blessed that our house is fully paid up and we get to keep our CPF for our retirement. Our dad told us that he lost a lot of money in investing and told us not to invest. We are happy to spend lesser and just save money in principal guaranteed products."
Here's the part these parents in their 60s and 70s didn't consider:
The world their kids live in is different from the one they build their wealth in.
Inheritance isn't simply about passing down assets. It's also about passing down values and an opportunity to pass down a legacy that lasts for more than one generation.
How did Baby Boomers build their wealth and does the formula still work?
Many of them practice delayed gratification. They saved diligently. They parked their money in fixed deposit accounts. They renewed yearly and watch it compound quietly.
If you look at the fixed deposit rates of the past, there was a point the rates went as high as 10.71% in 1981. This is kind of return is considered ambitious to expect consistently even in investments today. The prevailing promotional fixed deposit rates fall in the 1 percent range.
Some of my clients told me they build their wealth through endowments. One of my client bought from every insurer and she could tell me who has the most consistent track record for fulfilling their projections. That'll be a story for another day. Yet even for endowments, the projected rates on the policy illustrations have fallen over the years.
A common wealth building tool in Singapore is property. Before Dec 2011, Additional Buyer Stamp Duty (ABSD) didn't exist. Holding multiple properties was a common path to building wealth. Families who bought early, and smartly were rewarded in both capital gains and consistently flows of income.
Coupled with an inflation rate which hovered between 2%-2.5% pre-covid, you have a strategy that comfortably outpace rising cost of living.
Are there people who invested during that era? Of course. It's just less common, partly because people had less spending power and many have children. Baby boomers were less fortunate in getting access to higher education, hence many hit salary ceilings as they grew older.
The world is no longer the same today
Post covid, we have experienced inflation rates that have shot up to more than 4%. The thing is, even when inflation rate settles down, prices don't readjust itself. Your chicken rice today is still $4.50. It won't go back to $3.
The same principle applies to many other aspect of life. We now have million dollar HDB flats. Would the baby boomer generation ever expect that?
ABSD now exists. In fact, we had a few rounds of cooling measures. The name cooling measures itself reflects inflated prices.
So if cost of living goes up, owning more than one property becomes harder and interest rates have come down... how can the old playbook still work?
The low risk principal guaranteed instruments still exists. But can it be the only tool in your wealth arsenal? Life will not be as comfortable as the Gen X and baby boomer generations.
What kind of legacy gets passed down?
Most people believe it's mainly the assets, or to put it bluntly the money.
Maybe that's why these parents in their 60s and 70s believe it's okay if their kids money is only kept in the fixed deposit. They will be inheriting at least half a million to $1 million on top of a house anyway.
Yet, a legacy is not made up of just money.
It also includes your values, your beliefs, the principles you wish to inculcate in your children. In fact, that is what parents have been doing all these while. The thriftiness, the saving habit, the 'don't anyhow spend' mentality...
For some families, the low risk appetite, the 'avoid investment' mindset, etc.
When we do everything for our children, we are also sending a message we don't realise:
"You don't need to learn how to manage money."
For some like the client whose dad told them not to invest since he lost a lot of money?
The message becomes "you don't need to learn how to manage risk. Instead, avoid risk."
I've met so many clients who start off thinking all they need to do is be financially disciplined and keeping all their monies in the bank is good enough. They learned how to keep money, just not how to grow it.
Why?
Because they grew up hearing horror stories of their parent's investing journey and the lesson they took away was investment is bad, instead of: I need to understand the instrument before I invest.
They also learnt that keeping the money in fixed deposits are enough because that's how their parents build what they had.
The idea stays relevant, the tool might be outdated.
Why the saying 富不过三代 happens?
富不过三代 means wealth doesn't pass three generations.
If you look at the thesis I just presented, you can imagine why.
The 1st Generation actually learnt how to build wealth. Even if the strategy was as simplistic as putting the money in the fixed deposit and consistently renewing it at better rates, they understood what they were doing because they put in the research. They researched the fixed deposit rates, they compared the endowments and they track the due dates. They learnt the benefits of compounding.
Those who invested in properties learnt how to evaluate properties. If they made mistakes, they learnt from it too.
This generation are active participants of the wealth building process.
Now if we look at the 2nd Generation where the parent's manage the money for them or ceded them capital to buy properties... what did they really learn?
Sure the 2nd Generation picked up habits from their parents like prudent saving and making value for money decisions. But they never learnt how to steward the money they earned or potentially inherit.
So what happens when it comes to the 3rd Generation?
They learn from parents who took wealth building for granted. If they are lucky, they learn the thriftiness and saving habit. But they also inherit diminishing assets, if any at all. The unlucky ones might even become the sandwich generation.
That's one way wealth gets eroded across generations. The grandparents passed down money and values, the parents passed down financial discipline, the 3rd generation may have to restart all over again at a time when inflation and cost of living is even higher.
And how did this happen?
It starts when we pass down wealth without teaching the next generation how to make the financial decisions that built it. Learning how to manage money is just as important as traditional education.
How can we rethink what is the legacy we pass down?
Traditional Education ≠ Financial Education
I've heard parents tell me "I've done my duty once I give them a quality education. The rest is up to them."
Okay, but if you build your wealth and you didn't spend it all, it's going to be passed down anyway. Your children knows it. Why run the risk of wasting what you have built when financial education can be part of your legacy?
Parents should encourage their children to build their own wealth and make their money work harder for them. Think of it as on-the-job training (OJT) while you are still around to provide some advice. In fact, you might get a sense of their ability to make financial decisions from these observations and think of how you wish to structure the assets you eventually pass down.
Embed financial principles in family values you wish to pass down
Thriftiness and value-based spending can be a family value. Learning and being curious about how something works can be a family value. Not letting resources get wasted can also be a family value. Learning to leverage by outsourcing can also be a family value. Giving back to society can be a family value. The list goes on...
"Hard times create strong men. Strong men create good times. Good times create weak men. And, weak men create hard times."
This saying by G.Michael Hopf very aptly expresses our concerns over finding the balance between leaving something for our loved ones and nurturing weak children because there is little to work for.
I would argue it isn't the assets that make our children weak but the values we pass down throughout their upbringing and their adult life. Too often, families neglect passing down lessons on how to manage wealth.
Sometimes I hear parents tell me that they don't intend to leave money behind because capable children can build their own fortunes and incapable ones would squander it anyway. In my opinion, this is a form of self consoling avoidance.
If Singapore had to reset her efforts every time a new generation of government takes over, we won't be a tier 1 metropolitan city today. The better way to think about passing down a legacy could be to ask ourselves: how do we ensure we raise a strong next generation who can take the assets and values we leave behind to create even better times?
Lastly, I'd like to leave you with a food for thought.
What sort of assets, values and principles do you wish to pass down as your legacy?
If you would like to have a conversation on structuring your own legacy plans, feel free to reach me by dropping me a message.
Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about education planning.
About Janice
I specialize in identifying and eliminating structural retirement risks for high-income professionals and business owners who already think they’re doing enough.
Clients look for me primarily to outsource their portfolio planning so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions or business and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here.
You can reach me at 94313076 or my social media accounts on Linkedin and Instagram or using the link'Let's Talk'.
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