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Financial planning

What is generational wealth & how is it built?

Grandmother sitting on floor with two granddaughters with adult children watching
Grandmother sitting on floor with two granddaughters, father watching, getting together, relaxation, friendship
10'000 Hours/Getty Images

Many people think about building a brighter financial future for the next generation. In one sense, it's about helping them build a strong financial foundation by teaching them about good money habits. At another level, it's about building wealth to pass down to your heirs, helping to relieve some of their financial burdens. But what does generational wealth really mean? And are there ways to help build generational wealth for your loved ones? Here's what you need to know.

What is generational wealth?

Simply put, generational wealth is money and assets passed down from one generation to another. It's more than simply cash, though; investments, real estate, family businesses and other holdings are all a part of it.

Another aspect of generational wealth is the concept of intangible wealth. It includes education, spending habits, financial literacy, contacts and more. Even though those things are hard to quantify in dollars and cents, they still have value in their transfer. Consider a relative who holds a degree from a prestigious school and has a strong network. When that status helps open doors to life and business opportunities for their family member(s) that they would not have had otherwise, that's intangible wealth.

Right now, a massive wealth transfer is currently underway. Experts estimate approximately $53 trillion will pass from the baby boomer generation during the next 25 years. This suggests an important point: The average person can build wealth and leave a legacy for their loved ones with good planning and saving. To build generational wealth, you don't need to be incredibly wealthy.

Why generational wealth can matter

Everyone's financial situation is different, and for some, there are more challenges than others. But even seemingly small transfers of wealth can lead to outsized results when built over time.

According to the Federal Reserve, baby boomers own $16 trillion in real estate, $23 trillion in investment and retirement funds and $15 trillion in pensions. Many assets will be passed down to their loved ones in real estate, investments and cash. Someone on the receiving end of that wealth may benefit significantly from that generational wealth.

Not having to budget for student loans or other debts may mean they can buy a home earlier, pay off credit card debt, save more for retirement or take a chance on building a business. Those decisions can have financial influence over the long term. For many, the idea of generational wealth is to help future generations start with less debt and a leg up.

How to build generational wealth

While the ways to build generational wealth will vary person to person, you may want to consider how the following may impact your generational wealth strategy:

  • Improving your financial literacy
  • Investing with a diverse portfolio
  • Getting life insurance
  • Helping family members fund college
  • Starting a business
  • Building a financial team

In most cases, creating generational wealth takes a solid plan and a long time horizon. It's something you're building as part of your future legacy, which may be decades down the road, so it takes a long-term view and some dedication.

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Improve your financial literacy

Creating generational wealth isn't just about owning assets and reducing liabilities, although that's certainly a part of it. It's also about building an understanding of the ins and outs of personal finance.

Financial literacy can help you as you start to learn how to build generational wealth, but in a practical sense, it can also improve your day-to-day familiarity with your finances. Many people feel intimidated by their personal finances and are too afraid or overwhelmed to ask questions, which can cause problems over time.

Instead, realize that learning about finance is a long-term journey, and there is plenty of help out there. Starting with the basics, learning how to budget and the importance of good credit can help you build a solid financial foundation.

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Build an investment portfolio

When thinking about building wealth over time, many people look to the stock market. Having a diversified portfolio balanced for your risk level early means you can have decades for it to grow, withstand market fluctuations and take advantage of compound interest.

Many people turn to their 401(k)s to start since some employers offer them as part of a benefits package. If you have an employer-sponsored 401(k), consider contributing to it. Typically, contributions come directly from your paycheck and are made before income tax is taken out, so there may be some tax benefits. Also check whether your employer matches a percent of your contributions. If they do, try to take advantage of the maximum amount they offer since that's like free money in your account.

Your 401(k) isn't your only option for investing. You can open individual retirement accounts (IRAs) and other kinds of investment accounts on your own and set up contributions from your bank account. Working with a financial advisor can help as you get deeper into investing. They'll work with you to develop a long-term plan and offer guidance during the traditional ups and downs of the market.

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Invest in real estate

According to research from the Federal Reserve, the average sale price of a home in the United States in the first quarter of 1980 was $73,600. By the end of 2021, it was $477,900. For baby boomers who bought homes during this period, the value of their homes (in many cases) has grown astronomically.

That's why investing in real estate is a popular strategy for building generational wealth. In the most basic sense, as home values continue to rise, building wealth can start with buying a home. Once that mortgage is paid off, a home is an asset with a tangible cash value. The house can be passed down to beneficiaries and sold if it's not needed.

Another approach is to invest in real estate. Many investors start small. They buy a multi-family home, living in one part and renting out the others to cover the mortgage and begin to build wealth. Similarly, some people own vacation homes that they rent out when they're not using them.

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Consider life insurance

Life insurance has many benefits, but the primary one is that it's a tool designed to financially protect your loved ones after you pass. They can use your death benefit to pay a mortgage, square up debt or use as income replacement. Not having life insurance protection in place could mean that they struggle financially to make ends meet, making it more challenging to save for the future.

You may think a life insurance benefit through your employer is good enough. However, it may not fully cover your family's basic needs. It also may not be transferrable to a new job, leaving your family unprotected. If you're younger and healthy, life insurance may be one way to help build generation wealth since life insurance is usually much more affordable the earlier you start your coverage. Get started by calculating your life insurance needs.

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Start a college fund

As the cost of college has risen over the years, many people have borrowed student loans, which sometimes have taken decades to pay off in full. However, those with relatives who funded their education and avoided loans may start adulthood on a road that's a bit easier to travel.

Starting early and saving for your kids' college education can help them avoid significant debt. Consider looking into 529 plans*, which are college savings vehicles with tax benefits when used to pay for qualified educational expenses. You may be able to use money from a 529 plan for qualified expenses other than college tuition, such as payments on student loans or for educational classes at accredited learning institutions.

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Start a business

While this option isn't for everyone, another way to potentially build generational wealth is by starting a business. You can do it independently, with your family or with another outside partner. Running a family business may mean your loved ones are directly involved in the day-to-day management or will be, so it can be yet another leg up they'll have as they age. If you have any stake in a business, you can work with an attorney to set up documentation to help ensure your portion of a company gets left to your beneficiaries or that they get bought out and given the market value of your share in cash.

You don't have to open a corporation to make money from a business. The side-hustle and gig economy that exists today means you can have multiple revenue streams to both mitigate financial risk and boost your savings and wealth.

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Build your financial team

While not impossible, it's hard to build generational wealth by learning about it independently. Life can get in the way and send things off track.

Gathering a team of financial experts can go a long way toward meeting your needs. They can look at your current situation and help you plan for the future. Here's who to consider adding to your team:

  • Financial advisor
  • Accountant
  • Attorney
  • Any additional specialists for when the time calls for it, such as a tax expert, estate planning attorney.
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How estate planning can help pass generational wealth to loved ones

Once you start thinking about generational wealth, you'll want to consider how you will pass it down to your loved ones. That's where having your estate in order comes in. Estate planning — facilitated by an attorney — can help ease the transfer of your wealth, assets and other material goods to your loved ones after you pass. You and your attorney will work together to arrange things like making sure you have the  proper documentation for your estate plans.

Once you have your estate affairs documented, it's a good idea to review them regularly. You may wish to check your will, life insurance and any beneficiary designations yearly or after a significant life event and make any necessary changes.

Discussing generational wealth with loved ones

Conversations around money are never easy. When you add your family and close relationships into the mix, it may feel insurmountably difficult. But having all your loved ones on the same page about your goals and planning may avoid confusion and entanglements later.

Here are a few ways to approach talking about financial legacies:

  • Start the conversation. Take the leap and mention to your parents, your children, your partner or the loved one you have in mind that you'd like to either learn about their financial goals and legacy wishes or convey yours to them.
  • Have them set the pace. Come from a place of empathy and caring. Talking about the future may present realities that are hard for people to face. Let them know you want to make sure they're comfortable going over all this hard-but-necessary information.
  • Keep the door open. Their plans or your plans may change, so know that it's a topic you'll revisit with updates as needed. Once you get over the initial hurdle, you may find it's easier the next time.
  • Aim to take care of each other. If you approach your loved one and learn they don't have any plans in place, consider talking with them about finding a financial advisor and estate planning attorney they can pair with to get started. For your own children and beneficiaries, think about what you can do to improve their financial literacy and instill good habits.

Leaving a legacy

Building wealth over time isn't guaranteed, but it may not be as difficult as you think. It takes a solid strategy, sticking to a long-term plan and making adjustments.

Do you want to start creating a plan for your family and learn more about what is generational wealth? Connect with a local Thrivent financial advisor who can work with you to start developing goals and putting a plan in place for the future.

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*Offered through a brokerage arrangement with Thrivent Investment Management Inc. 529 college savings plans are not guaranteed or insured by the FDIC and may lose value.

Consider the investment objectives, risks, charges, and expenses associated before investing. Read the issuers official statement carefully for additional information before investing.

Investigate possible state tax benefits that may be available based on the state sponsor of the plan, the residency of the account owner, and the account beneficiary. Consult with a tax professional to analyze all tax implications prior to investing.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.