This weekend we are taking the family up to Gainesville to visit the University of Florida. My daughter is a senior, and it is time to make a college decision. We are so proud of her. She worked so hard throughout high school that she now has a lot of options for college. She also got some very smart genes from her parents. 😉
I went to Penn State, which had a good football team, and Florida has a good team as well. But, of course, the decision to attend a college should not be based solely on its sports program. But Dad wouldn't mind attending some big games, though! But, of course, it is her decision.
She is still deciding on a major, but how many people really know what they want to do when they are seventeen? I thought I wanted to be a teacher, and then I went through student teaching. I quickly realized that teachers are underpaid and underappreciated for a very demanding career.
I was getting my hair cut today and learned that my barber was 35 years old with three young kids. I congratulated him on his beautiful family. And, then, considering I never stop thinking about finances, I asked him how much life insurance he owned. He said he had nothing! I immediately took him to a website and demanded he get some immediately. For $1,000,000 in coverage, it only costs him $60 a month. This is a reminder to all you grandparents out there. Call your kids and make sure your grandkids are protected!
My favorite orchid is currently blooming!
How much money will pass to heirs in the next 30 years? According to Time magazine, the number could reach over $30 trillion. Yes, that is $30,000,000,000,000.
Today, I will offer an alternative to leaving money to your kids.
Whenever I create long-term spending plans for my clients, I sometimes hear, “But Dave, I understand you want us to start spending some of our savings when we retire, but we don’t need the money right now. We’ve learned to live frugally over the past forty years. We don't want to spend money for spendings sake.”
“It’s awesome that you’ve built up those habits,” I’ll usually reply, “That is a big part of why you are in the position that you are in. But if you don’t use your money, someone else will—maybe the government, maybe your heirs—but you need to seriously think about what this money is FOR.”
No one will ever be as good a steward of your savings as you. For maximum impact, let me repeat that: No one will ever be as good a steward of your savings as you. You’ve worked for it, earned it, and appreciated it. You have a more intimate connection to your money than anyone else could.
You hear about it all the time. Kids inherit their parents' money, and this causes discord. They waste it. They fight with their siblings. They don’t treat it with the same care and respect as their parents did. Athletes sign huge contracts, oftentimes straight out of school. They blow through the money because they weren’t prepared for it. Many lottery winners say that winning the jackpot was one of the worst things that ever happened to them. They don’t know how to steward the money because they didn’t earn it.
Of course, you need to do the appropriate planning to ensure you don’t outspend your savings, but once you make sure you are not mortgaging your future, you get to start determining how you want to use the money—right now. I want to be very clear. I am not asking you to become materialistic. I am merely suggesting that you start living your life with a renewed sense of opportunity.
Which brings me back to your kids. As opposed to leaving them a large lump sum of money at your death, I think there’s a better way:
Give them a little bit here and there now. Or, put another way, dole out their inheritance a little bit at a time for the next 20 or 30 years. Of course, we don’t want to enable our children; you must make that determination.
To ensure a secure retirement, it is recommended that you use only the earnings obtained from your investments, which should average around 5%, and not the principal amount. You should start using this amount each year starting from your first year of retirement. You may wish to consider sharing some of your earnings with your children now.
The benefits are numerous.
Benefit #1: Your kids are in their twenties, thirties, and forties, which are the most complicated and difficult times in somebody’s financial life. They are having children, buying homes, and starting careers. This is when they need the money. When you’re gone, your kids could be in their sixties and seventies.
Benefit #2: You can see your kids actually use and appreciate the money. You get to attend your granddaughter’s piano recital (you paid for the lessons). You get to see the relief on your son’s face when he realizes they can replace the car that keeps breaking down.
Benefit #3: You can see how your kids treat money. Are they acting responsibly? Are they making sound financial decisions? Better yet, you can mentor and guide them on better managing their assets. And if they blow your cash?
Well, it’s certainly better that you know that now.
Benefit #4: It is tax efficient. Taking out a little money from your retirement accounts each month stretches out the tax liability. It is much better to take a little bit of money out each month versus large lump sums here and there.
Heirs have the option to use a "stretch IRA" which allows them to spread out their tax liability over ten years. However, even with this option, the tax burden can still be significant. In reality, I often see beneficiaries cash out their IRAs completely. If, for example, a $500,000 IRA is cashed out by your beneficiary, it could result in over $150,000 in taxes.
(Mega) Benefit #5: You are teaching your kids an incredible lesson about generosity. Your kids get to see firsthand that Mom and Dad are not materialistic or overly stingy. Mom and Dad value what really IS valuable: relationships, family, and a giving spirit.
If your kids see your generosity, they will grow to be generous themselves and your legacy will last for generations.
As a side note, I've noticed that giving cash isn't always the most effective way to help someone out. Sometimes, it's better to give them something tangible, like a car, a down payment on a house, or an all-expenses-paid trip for the family. It's important to keep in mind that if you give something to one child, the others may expect the same treatment. To avoid any confusion or resentment, it's best to discuss it openly with the entire family.
Be Blessed,
Dave