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How to make wealth last

By Judy Martel · Bankrate.com
Friday, May 9, 2014
Posted: 3 pm ET

Wealthy individuals, especially those who are self-made, typically want to create a legacy, either for their heirs or for charity. Yet a new study by Merrill Lynch finds that, while nearly two-thirds of individuals with $10 million or more want their wealth to last multiple generations, few understand how to sustain it.

Making wealth last requires a plan and good family communication.

Making wealth last requires a plan and good family communication.

"Most families don't make the grade when it comes to preserving wealth across generations," Stacy Allred, managing director and wealth strategist for Merrill Lynch's Private Banking and Investment Group, said in a release.

How much to spend?

Part of the sustainability problem has to do with overspending. In the survey, 41 percent of respondents said a 4 percent to 8 percent annual withdrawal rate is low enough to sustain a portfolio forever and 20 percent said they are clueless about the correct withdrawal amount.

Most financial planners agree that 2 percent to 4 percent is a realistic range, depending on what's happening in the economy and the stock market. Only 16 percent of respondents said a rate of between 1 percent and 3 percent would nearly guarantee they could leave a legacy.

Trust: It's not all in the family

Wealthy families also grapple with a misunderstanding of the importance of communication within the family.

More than half the respondents in the survey said the biggest threats to their wealth are performance of the markets or investment returns. Forty-four percent attributed loss of wealth to government actions.

Fewer than 10 percent of respondents said lack of communication within the family is responsible for eroding wealth. But the study cites a 2010 report by Roy O. Williams, "For Love & Money," that says 60 percent of the failures to transfer wealth from one generation to the next are caused by breakdowns of communication and trust within the family.

A road map to guide your way

The root of effective estate planning is a strategy. Once the plan for leaving a legacy is developed, families should make sure everyone understands it and buys into it.

Allred noted that the first steps are determining the purpose of your wealth and how long you'd like it to last. "With these insights, you can establish certain safeguards and back into a spending rate that may not deplete the family assets."

Watch a video on the eight stages of estate planning.

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