News Column

Want Your Wealth to Last for Generations? Check Your Spending and Consider Talking to the Kids about Family Money, Merrill Lynch Study Finds

May 6, 2014

NEW YORK--(BUSINESS WIRE)-- Seven out of 10 (69 percent) high net worth Americans want their wealth to last at least through their children’s lifetimes, 43 percent through at least their grandchildren’s, and 17 percent would just as soon want it to last forever. This is according to new research from Merrill Lynch’s Private Banking and Investment Group published in a report titled “Can You Make the Money Last? The Road to Sustainable Wealth,” which is now available at www.pbig.ml.com/sustainingwealth.

In more than two out of three instances, family wealth fails to outlive the generation following the one that created it, and 90 percent of the time, assets are exhausted before the end of the third generation – often referred to as the “shirtsleeves to shirtsleeves” phenomenon.1 This new Merrill Lynch study of wealthy individuals with at least $5 million in investable assets explores people’s desire to make their money last, risks that can derail this goal, and when and how wealth is discussed and transferred to future generations.

“Most families don’t make the grade when it comes to preserving wealth across generations,” said Stacy Allred, managing director and wealth strategist for Merrill Lynch’s Private Banking and Investment Group. “This unfortunate reality can often be avoided by understanding pitfalls and developing a strategy. Determining the purpose of your wealth, including how long you’d like it to last, is a critical first step. With these insights, you can establish certain safeguards and back into a spending rate that may not deplete the family assets.”

Many people have unrealistic notions about what constitutes a sustainable spending strategy should they want their wealth to last for several generations. For instance, two out of five people surveyed (39 percent) believe a portfolio could last forever with an annual distribution rate of 6 percent or more, while another one out of five (20 percent) simply has no idea what an appropriate distribution rate would be. In reality, data suggests that, even for the wealthiest families, true wealth sustainability may require an average distribution rate as low as 2 percent per year2 – a fact understood by only 16 percent of those surveyed.

“Establishing a plan for wealth sustainability, and rallying a family to stick with it, can take comprehensive, cross-generational conversations about spending, saving and giving priorities,” said Michael Liersch, Ph.D., head of behavioral finance for Merrill Lynch. “In some cases, families may have to temper lifestyle expectations and sort through complex dynamics and emotions in order to clear the way for such candid, productive discussions.”

Connecting with children about family money

With $41 trillion expected to be transferred from one generation to the next between 1998 and 20523, the largest wealth transfer in history, the stakes are high for families who wish to successfully pass on and preserve their wealth. Industry research has shown that most wealth transfer failures are the result of breakdowns in communication within families.4

Such risks to wealth sustainability are well within a family’s power to mitigate. Though often viewed as difficult or even taboo, discussions with children at an early age about responsible financial behaviors can be critical to this endeavor. The Merrill Lynch study found that:

  • Thirty-nine percent of those surveyed believe it is never too early to start conversations about responsible financial behaviors with the next generation.
  • Sixty-eight percent believe such discussions should begin before an heir’s 18th birthday, though only 45 percent have them this early.
  • Only 29 percent believe that families should wait to have these conversations at or after the age of 18, yet that’s when 48 percent actually do.

    “Parents also avoid discussions about the extent of their family’s wealth with their children in fear of dulling their ambitions or creating a sense of entitlement,” added Liersch. “While important to reveal such sensitive information in the right way and at the right time, outright resistance may be viewed by the next generation as a sign of distrust or lack of faith in their judgment, which can lead to a lapse or collapse in communication.”

    Most parents (66 percent) believe discussions with heirs about the extent of the family’s wealth should begin before they reach the age of 25 (54 percent actually do this), and one-third (34 percent) feel they should begin even before the age of 18 (24 percent do).

    Attitudes about when to hand it over

    When asked when and under what circumstances heirs should have access to family wealth, survey respondents’ ideas varied:

  • Seventy-four percent believe their heirs’ share of family wealth should be given as they achieve specific goals in life, such as completing their education, starting a career or getting married.
  • Seventy-three percent earmark wealth distribution to help with the cost of specific milestones, such as funding a graduate degree or buying a first home – women (82 percent) even more so than men (65 percent).
  • Sixty-six percent believe heirs’ share of wealth should be distributed on a controlled basis throughout their lifetime via a trust.
  • More than half (54 percent) base wealth distribution on reaching a certain age. Among whom, 58 percent believe heirs should be given unlimited access to their share of family wealth before the age of 35, while 16 percent feel this should wait until age 45 or older.

    “Many families establish a statement of values to lay out an explicit philosophy about wealth and the impact they want it to have for themselves, their families and their communities,” added Allred. “Being intentional about this process leaves them poised to make better decisions. While family members may feel vulnerable as they work together to define goals, they’re likely also to experience excitement and relief as gaps between expectations and reality narrow, and a meaningful vision about wealth sustainability comes into focus.”

    For a full copy of the report and to view interactive charts showing how long money may last based on different distribution rates, visit www.pbig.ml.com/sustainingwealth.

    Methodology

    The nationwide survey of 171 U.S. consumers with $5 million or more in investable assets was conducted in December 2013 by Phoenix Marketing International, an independent market research firm, on behalf of Merrill Lynch’s Private Banking and Investment Group. All data were tested for statistical significance at a 95 percent confidence level.

    1 “For Love & Money: A Comprehensive Guide to the Successful Generational Transfer of Wealth,” Roy O. Williams, 2010.

    2 Analysis by Merrill Lynch Global Wealth Management Investment Management & Guidance Investment Analytics and Quantitative Wealth Management Analytics Group.

    3 “Millionaires and the Millennium: New Estimates of the Forthcoming Wealth Transfer and the Prospects for a Golden Age of Philanthropy,” Boston College, 1999.

    4 “For Love & Money: A Comprehensive Guide to the Successful Generational Transfer of Wealth,” Roy O. Williams, 2010.

    Merrill Lynch Global Wealth Management

    Merrill Lynch Global Wealth Management is a leading provider of comprehensive wealth management and investment services for individuals and businesses globally. With over 13,700 Financial Advisors and $1.9 trillion in client balances as of March 31, 2014, it is among the largest businesses of its kind in the world. Within Merrill Lynch Global Wealth Management, the Private Banking and Investment Group provides tailored solutions to ultra affluent clients, offering both the intimacy of a boutique and the resources of a premier global financial services company. These clients are served by more than 150 Private Wealth Advisor teams, along with experts in areas such as investment management, concentrated stock management and intergenerational wealth transfer strategies. Merrill Lynch Global Wealth Management is part of Bank of America Corporation.

    Merrill Lynch represents multiple business areas within Bank of America’s wealth and investment management division including Merrill Lynch (North America and International), Merrill Lynch Trust Company, and Private Banking & Investments Group. As of March 31, 2014, MLGWM entities had approximately $1.9 trillion in client balances. Client Balances consists of the following assets of clients held in their MLGWM accounts: assets under management (AUM) of MLGWM entities, client brokerage assets, assets in custody of MLGWM entities, loan balances and deposits of MLGWM clients held at Bank of America, N.A. and affiliated banks.

    Merrill Lynch makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a registered broker-dealer, member SIPC, and registered investment adviser, and other subsidiaries of Bank of America Corporation (“BAC”).

    Both brokerage and investment advisory services (including financial planning) are offered by the Group’s Private Wealth Advisors through MLPF&S. The banking, credit and trust services sold by the Group's Private Wealth Advisors are offered by licensed banks and trust companies, including Bank of America, N.A., member FDIC, and other affiliated banks.

    Investment products offered through MLPF&S:

    Are Not FDIC Insured     Are Not Bank Guaranteed     May Lose Value


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