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Generational wealth is something that most parents aspire to create. But, statistics show that it is very difficult to accomplish. It is estimated that 70% of families lose their wealth during the second generation.
Chelsea Ransom-Cooper, financial planner and managing partner at Zenith Wealth Partners, shared with Insider the most common mistakes she’s seen clients make on the path to building generational wealth.
1. Do not save and invest for your own retirement
Many parents save and invest for their children without ensuring that their own retirement is secure. Ideally, parents can do both. However, if they have to choose between their retirement savings and their education savings, many parents favor the latter to the detriment of securing their future. The decision they make to give their children the best possible chance may be a hindrance to them in the long run, as children may have to look after their parents financially in retirement.
“A lot of people are struggling with student loans. Many parents don’t want their children to have student loans because they realize how long it can take to pay them off. But there are other tools they can There are different options for work-study and education, but parents need to make sure they prioritize their retirement and then focus on saving -studies, ”Ransom-Cooper told Insider.
2. Not understanding which investment vehicles to use
Until recently, people relied heavily on retirement and Social Security benefits for their retirement. But with the demise of retirement benefits and the cash-strapped Social Security talks in the future, parents must learn to effectively use the new retirement savings options.
“Accounts like the Roth IRA and the 401 (k) are all still fairly new,” Ransom-Cooper said. These accounts have been around for about 23 and 43 years, respectively, and many people still don’t understand how they work and what tax benefit they can bring.
Additionally, Ransom-Cooper noted that many parents do not understand the power to invest and
. As a result, they often leave money for their children in savings accounts instead of investment accounts, where it is unlikely to increase much, if at all.
“I still meet a few parents who are saving for their children in general savings accounts. I spend a lot of time helping my clients understand how the stock market works, so that they feel more comfortable investing. these savings for their children and allow that growth to compound in their favor, ”said Ransom-Cooper.
3. Poor estate planning
Parents often fail to have a solid estate plan to help secure their estate for the next generation. Having an estate plan in order, such as a will, enduring power of attorney, health care power of attorney, beneficiary designations and / or guardians for young children, is a necessary step that parents often fail to take.
“Not having an estate plan in place, especially with young children, not structuring the assets, that’s something I commonly see. Sometimes people leave things straight to their children, but their children are minors. “she said.
Parents need a stronger game plan in case something happens to both of them. “What does this guardianship look like? During this pandemic, I have had clients who have lost family members. Also, the approval process has been much longer than before the pandemic. So make sure that you have plans in place that can immediately kick in for your family can be a huge time and money saver. ” said Ransom-Cooper.
4. Not having conversations about money and how to build wealth
Few parents intend to teach children about money. But learning about personal finance when you’re young helps kids grow up and have a healthier relationship with money.
Ransom-Cooper emphasized the importance of teaching children what they can do with money beyond spending, such as helping them understand how their decisions to save and invest their money early can make life easier in the long run. Parents can help children avoid the financial mistakes young adults often make for lack of information when talking to their children.
“The challenge is that when you don’t have these conversations with your kids, you put them in deficit. They must therefore learn other means and tools which are not necessarily so precise. And a lot of the clients that I serve, we have a lot of conversations about their relationship with money. Nine times out of 10, they say their parents didn’t have conversations about money, ”Ransom-Cooper said.
5. Doing too much for their children
Ransom-Cooper said she has clients who go out of their way to put their children in place financially to the point where it makes it harder for them to become adults.
“I have worked with clients who have also been in this space where their parents did it all. Now they have no idea how to handle any of these scenarios and spend money when they do. see it. So it’s a balancing act. You don’t. want to do everything, and then your child has no understanding or concept of money. But you don’t want to do too little, where your child feels like they have to do it all and prime on their own, so there’s a fine in between, ”said Ransom-Cooper.
As a parent, it’s essential to work towards your individual financial goals, think about the opportunities you would like your kids to have, and work from there.
“Look at different financial tools. If you know education is important to your family, then lean on some vehicle, like a 529, where you can get tax-deferred growth and use it for education. If you know you want flexibility and options, consider depository investment accounts, ”said Ransom-Cooper. “I have seen a positive change since the pandemic where parents are more interested and proactive in creating wealth that will last beyond their generation.”