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Building Generational Wealth through an Alternative Retirement Portfolio Planning Technique

Posted on 06 Dec 2023
Author: Sayan Sircar

Tags: Retirement

6 mins read
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This article discusses an alternative retirement portfolio construction method for generational wealth transfer.

Building Generational Wealth through an Alternative Retirement Portfolio Planning Technique

This article is a part of our detailed article series on the concept of building and transferring generational wealth. Ensure you have read the other parts here:

Can NPS Vatsalya be used to create wealth across generations?

This article explores using the NPS Vatsalya scheme for grandparents to transfer wealth to their grandchildren by gifting them a large corpus to be used to create a pension income stream.

How can grandparents invest for their grandchildren?

This article provides multiple options for grandparents to transfer family wealth to their grandchildren.

A story about investing after retirement

A father retires at 60 with a retirement corpus of provident fund and other benefits. Instead of investing in the usual FD, SCSS, or Post Office type of schemes, he decides to invest in gold coins. He decides to buy 30 gold coins, each of the same weight, from his entire retirement corpus money.

His son, who is 30 with a well-paying job, wants to take care of his parent’s expenses from his income. Every month he puts money in a joint account held with his parents from where his father runs his monthly expenses. When expenses go up over time, he increases the monthly contribution.

Every year, on the anniversary of retirement, the father gifts one of the gold coins to his son which the son keeps in his locker.

The arrangement continues until the death of both parents.

After 30 years, the son is now 60 years old with 30 gold coins in his locker. He also retires now and has a 30-year-old child himself. He decides to implement the same scheme again by buying 30 new gold coins. This cycle then continues generation after generation.

What does this story show us?

Rule: Invest only in inflation-beating assets

First and foremost, this article is not about investing in gold coins. It is about investing retirement corpus in an asset that holds its value vs inflation. The alternative of investing in fixed-income investments that continuously lose value over time is avoided. This principle is contrary to the traditional safe investment options for senior parents: How can children help their retired parents to set up their finances?.

Rule: Expenses come from cash flows and not via investing

Secondly, expenses for the whole family, father and son along with respective spouses, come from the income of the son.

Pre-requisite: Safety nets to protect income

This income stream is protected from disruption via adequate insurance (life, health and accident) as well as improving the earning capability over time.

Enabler: The family is able to openly discuss money matters

Third, the family has reached a particular level of maturity regarding financial management with continuous communication regarding money matters and a sufficient level of trust to implement this system for 30 years.

Rule: Continuous income coverage via risk transfer

Fourth, market risk, due to investment in a fluctuating asset is taken care of by the regular income of the son. This addresses a common complaint about investing in risky assets.

Rule: Enable slow transfer of assets against cash flow

Fifth, the parental assets are slowly transferred to the child over time. This gives the child the opportunity to utilise those assets to build their own retirement corpus. Except for the assets that are already transferred, the parent retains control over the rest of the corpus in a liquid form.

Enabler: Investments are done in tax-efficient manner

Sixth, since assets are not sold at any time and just gifted from father to child, there is no capital gains tax or gift tax. Since there is no interest income in the family, we are saving tax on interest which is generally at slab rates.

Seventh, and most importantly the family’s wealth, measured in inflation-beating assets, does not decrease with time.

Following these principles above allows the creation of generational wealth. Some specific rules have been highlighted above

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Also read
What is an Investment Policy Statement and why it is needed?

What is generational wealth?

Generational wealth is how financial assets get transferred from one generation to the next. The alternative to creating generational wealth is that each generation starts its investment journey from scratch since the previous generation depleted all the corpus.

A lot of people might be a fan of the school of thought that says children should start from scratch and get somewhere via hard work. Others, who truly understand how compounding of wealth works, will want their wealth to be compounded across generations by ensuring that the next generation always starts at a wealth level close to their own.

Goal-based investing, by definition, does not allow generational wealth to be created since the purpose of investing for a goal requires you to

invest a large part of the corpus in safe assets to ensure that you can meet the goal
spending the money for the goal, like retirement, depletes the corpus

It can be theoretically argued that any excess amount, over and above that is needed for long-term goals like retirement, may be invested for the next generation. However, if the family struggles to meet their retirement corpus target while they are working then they have no chance of creating generational wealth by investing any extra amount.

This is our first article on the concept of generational wealth. We will build on the concept over time in future articles.

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