People do not amass wealth through hard work alone. People amass wealth through a combination of luck, favorable economic conditions, sufficient startup capital, and hard work. In order to maintain that wealth, a person must continue to have some sort of luck, favourable economic conditions, and enough extra wealth to live off of.
The short of it is basically that for each generation the size of the family increases. At the same time, the wealth amassed will fluctuate with gains and losses in the economy. On average, it takes 3 generations for wealth dilution and economic recession to destroy a fortune.
Example. You have a family with a spouse and 4 kids. You amass a fortune of $100 million dollars. On average you get 2% real gain (after inflation and taxes) and you live on $1 million a year. This means that if things continue at this rate, you will gain $1 million every year.
One year, your fortune takes a hit. The stock market falls, and you are left with half of your previous wealth. so you have $50 million, but you are still making 2% returns and living off of $1 million a year. 10 years later the market soars and your stocks double. You have $100 million again.
20 years pass, your children all get married have 4 kids and you and your wife die, leaving behind a fortune of ~122 million.
Now your son John has inherited $30 million. John is still making 2% return a year and his family is living off of $500,000 a year because he is more frugal. He nets about $100,000 every year. John too experiences a recession that halves his wealth. Leaving $15 million left over. Then he experiences another 10 years of 2% growth. He is still pulling $500,000 a year out to support his wife and kids. This means that he nets negative $200,000 a year. After 10 years. He has $13 million left. The stocks eventually recover and his wealth is doubled. He has $26 million, $4 million less than he started.
20 years pass, he dies leaves behind $28 million. His children all get married and have 4 kids.
John's son Ted inherits $7 million. He lives off of $140,000 that he pulls out a year plus $50,000 he makes as a teacher. His money still makes a return of 2%. The market crashes; his wealth is halved. He now has $3.5 million in investments that make only $70,000 a year. His kids go to college. Because he is still very wealthy, he receives no financial aid. It costs him $500,000. He wants to move to a cheaper house, but currently he owes more than the house is worth. He figures its cheaper to keep paying for this house that he can't afford than take the loss so he stays. 10 years later, he has $1.5 million left. The stock market recovers, and his wealth doubles to $3 million.
10 years later, he dies, leaving behind $1.6million to his 4 kids. Todd and Jeff each buy a house with their inheritance. Linda and Jessica put the money toward their children's education. When Linda's oldest daughter goes to college she stays in a dorm named after her grandfather. People jokingly ask if she is related. She sheepishly says yes. People look at the used Toyota that she drives and call her a liar behind her back.
tl;dr Families grow at a faster rate than the return on investments minus the cost of supporting said family.
Edit:
I'm getting flak for not using realistic numbers. My point is that people who are reasonably living within their means will deplete their wealth overtime because the hit taken during recessions. Using strictly realistic numbers is a lot more hassle and the point is still the same. The following is a real example, instead of the above.
You have 10 million. You withdraw $500k a year because you expect an annual return of 5%. A recession hits. The stock market loses 10% a year for 5 years. Then the stock market recovers. You make 22% a year for 5 years. The annual real rate of return is ~5%, but because you have been withdrawing 500,000 a year during the recession, you end up with 6.2 million over 10 years instead of $10 million
The 3 examples were meant to demonstrate people spending less far less than their expected rate of return, people spending near, but less than their expected rate of return, and people spending at their rate of return. As each, person's spending approaches their expected rate of return and as each generation fractures the remaining wealth, each individuals wealth rapidly diminishes,
<https://old.reddit.com/r/explainlikeimfive/comments/4786lr/eli5why_is_the_kondratieff_cyclefamilies_losing/>
The short of it is basically that for each generation the size of the family increases. At the same time, the wealth amassed will fluctuate with gains and losses in the economy. On average, it takes 3 generations for wealth dilution and economic recession to destroy a fortune.
Example. You have a family with a spouse and 4 kids. You amass a fortune of $100 million dollars. On average you get 2% real gain (after inflation and taxes) and you live on $1 million a year. This means that if things continue at this rate, you will gain $1 million every year.
One year, your fortune takes a hit. The stock market falls, and you are left with half of your previous wealth. so you have $50 million, but you are still making 2% returns and living off of $1 million a year. 10 years later the market soars and your stocks double. You have $100 million again.
20 years pass, your children all get married have 4 kids and you and your wife die, leaving behind a fortune of ~122 million.
Now your son John has inherited $30 million. John is still making 2% return a year and his family is living off of $500,000 a year because he is more frugal. He nets about $100,000 every year. John too experiences a recession that halves his wealth. Leaving $15 million left over. Then he experiences another 10 years of 2% growth. He is still pulling $500,000 a year out to support his wife and kids. This means that he nets negative $200,000 a year. After 10 years. He has $13 million left. The stocks eventually recover and his wealth is doubled. He has $26 million, $4 million less than he started.
20 years pass, he dies leaves behind $28 million. His children all get married and have 4 kids.
John's son Ted inherits $7 million. He lives off of $140,000 that he pulls out a year plus $50,000 he makes as a teacher. His money still makes a return of 2%. The market crashes; his wealth is halved. He now has $3.5 million in investments that make only $70,000 a year. His kids go to college. Because he is still very wealthy, he receives no financial aid. It costs him $500,000. He wants to move to a cheaper house, but currently he owes more than the house is worth. He figures its cheaper to keep paying for this house that he can't afford than take the loss so he stays. 10 years later, he has $1.5 million left. The stock market recovers, and his wealth doubles to $3 million.
10 years later, he dies, leaving behind $1.6million to his 4 kids. Todd and Jeff each buy a house with their inheritance. Linda and Jessica put the money toward their children's education. When Linda's oldest daughter goes to college she stays in a dorm named after her grandfather. People jokingly ask if she is related. She sheepishly says yes. People look at the used Toyota that she drives and call her a liar behind her back.
tl;dr Families grow at a faster rate than the return on investments minus the cost of supporting said family.
Edit:
I'm getting flak for not using realistic numbers. My point is that people who are reasonably living within their means will deplete their wealth overtime because the hit taken during recessions. Using strictly realistic numbers is a lot more hassle and the point is still the same. The following is a real example, instead of the above.
You have 10 million. You withdraw $500k a year because you expect an annual return of 5%. A recession hits. The stock market loses 10% a year for 5 years. Then the stock market recovers. You make 22% a year for 5 years. The annual real rate of return is ~5%, but because you have been withdrawing 500,000 a year during the recession, you end up with 6.2 million over 10 years instead of $10 million
The 3 examples were meant to demonstrate people spending less far less than their expected rate of return, people spending near, but less than their expected rate of return, and people spending at their rate of return. As each, person's spending approaches their expected rate of return and as each generation fractures the remaining wealth, each individuals wealth rapidly diminishes,
<https://old.reddit.com/r/explainlikeimfive/comments/4786lr/eli5why_is_the_kondratieff_cyclefamilies_losing/>
sincerely,