The best legacy you can leave your kids

A CURRENT trend in the financial services industry is the focus on generational wealth, which has become something of a buzz-phrase and refers to wealth that is passed down to the next generation. This and the phrase “leaving a legacy” are being bandied about in a way that may give the impression that providing a substantial inheritance for your children should be an important part of your financial plan.

I believe you need to look very carefully at the concept of generational wealth and how it applies to you and your family before incorporating it into a financial plan.

We would all like to be in the financial position to leave our children money to ensure that their lives are easier than ours. But the facts – and basic common sense – suggest that leaving your children oodles of cash should not be a priority in your planning, and it may do more harm than good.

Only about 6% of people retire with enough money to enjoy a comfortable retirement, which means that the percentage of people who can afford to both retire comfortably and leave a substantial inheritance for their children is very small.

Any clear-headed financial adviser will tell you that you should never prioritise leaving money to the next generation above your own needs in retirement. When you stop working, you and your spouse come first. Apart from your daily living expenses and the odd luxuries, you will probably need more than you realise for medical expenses – these rocket in the last couple of decades of life. Remember, your biggest enemy in retirement is inflation: you need to factor this into your planning, especially in the rising-inflation environment we’re experiencing currently.

It’s a bonus for your kids if, after you and your spouse have passed on, there is something left for them. But don’t make sacrifices to that end and, vitally, don’t raise their expectations that they are in for a windfall when you go.

It’s a fact that if money comes too easily to young people, they are unlikely to appreciate it and highly likely to squander it. This is borne out by research among wealthy families that shows that wealth created by one generation is generally gone within three subsequent generations.

If you do have the money to leave your kids after ensuring you and your partner are looked after, you may consider an instrument such as a trust to control how that inheritance is used.

So what legacy should you leave your kids?

The best legacy you can leave your children is not money; it’s their memory of you as a loving, caring parent who did as much as you could to ensure they had a stable, secure upbringing and attained the education, skills and work ethic to be self-reliant and contribute positively to society.

One area of their education that will probably empower them as much as a tertiary qualification, and is unfortunately not taught in schools, is financial literacy. If you can teach your kids to be savvy with money, they will be forever in your debt.

The worst legacy you can leave your children is letting them develop a sense of entitlement, whereby they fail to learn the value of money and come to expect “the good life” without having to do anything productive to earn it.

Sumayya Davenhill, head of marketing at M&G Investments says kids, like adults, are bombarded with messages that encourage frivolous spending. She says children – especially younger children – model the behaviour of those around them. “Actions speak louder than words. If they see you buying whatever you want, whenever you want, they’ll think you have an endless supply of money. Instead, talk to them about saving, and encourage them to delay gratification by regularly getting them to put a little bit aside from this week’s pocket money to have an enjoyable experience, like going to the movies, in a few weeks’ time.”

Davenhill offers more tips on preventing “entitled” children:

“Don’t give in to every request your child makes to buy something. This only reinforces the idea that money is easy to come by and doesn’t help them experience impulse control. In fact, kids who are always given what they want, when they want it, can end up with debt problems.

“Try to embed the concept of working for a living. Take them to your office to show them where you work and help them to understand that’s how you make money. Give them simple chores to do to earn pocket money.

“Teach them to value experiences just as much as, if not more than, things. Spend time with them doing simple activities, like going for a picnic in a park.

“In the same vein, don’t use birthdays and other special occasions as a reason to spend lots of money. Focus on fun, affordable activities with friends and family instead. Or better still, open up an investment for them, where you can teach them the fundamentals of investing.”