Are you crazy?
You are going hand down millions of dollars to your kids!
Ok, I get it, you are sitting their shaking your head because one, if you do have kids they are just little rug rats at this stage and you are way away from having your own funeral in the near-term future. Plus you do not have millions of dollars anyway, you may be still in the negative net worth column and if not you can no doubt remember a couple of years back when you were. But let me promise you, this is not hypothetical, you may not be there now, but you will be there in the future.
Making my case for future millionaire you is pretty easy so let me lay it out for you.
1. You are in this community. The FI, FIRE, Frugal, Life Hacking, Career Boosting, Entrepreneurial, Side Hacking and etc. community. Need I go on? If you are reading in this space you are likely having an inordinate amount of success in your pursuit of financial independence, however you define it.
2. The 4% rule. Everybody talks about how the underlying studies show a high rate of success for anyone that sticks with the 4% safe withdrawal rate. With success defined as an insignificant chance of running out of money. What is less often noted is that in two thirds of those cases the retiree ends up with over twice the amount of money he had at retirement, and only 10% of the time was the amount of the estate after death smaller than the original retirement nest egg. That means even if your magic number for early retirement is $500,000 there is a big chance that will grow to a million by the time you leave this mortal coil (every post needs a little Shakespeare).
3. You are killing it, and won’t know how to stop.
Most of this community of financially savvy learners is not going to be content laying on the beach for fifty years. You people get things done, you are smart and focused and are winners. The very fact that you have a plan means you are the kind of person who will always be shooting at some target ahead of you. So what? Well, the what is that you will continue to earn money, and probably even more than you spend, for the rest of your life. It may be in a location independent web based business or something more old fashioned like my consulting side gigs but it will earn you substantial income and will keep you at a 0 to 2% withdrawal rate instead of 4%. And those kind of withdrawal rates end up allowing your nest egg to not just double but grow to three to five times what you retired with. Like it or not you are going to be a millionaire or more likely a multimillionaire before your heirs receive an inheritance.
So now that I have your attention and cautious agreement that you will be faced with deciding the final destination of over a million dollars and most likely over a million dollars per child lets talk about that. I have an advantage over you in that my three kids are aged 27, 30 and 33. I know the kind of adults my kids will turn into, you don’t. Similarly I know the kinds of adults my friends’ kids have turned out to be as well. And guess what, our kids are not like us!
I was a meat eating southern guy. My wife grew up on a farm where slaughtering pigs, chickens and cows was just another daily activity. One of my daughters is a vegan, the other eats no pork. I convinced two of my three children to pursue engineering because I had so much fun doing it. Neither of them found engineering very interesting and one ended up in regulatory work while the other went back to school and is a doctor. Your kids will be like you in some ways and unlike you in many others, but how they will be with money you can’t know.
The Dave Ramsey Paradox. Now first let me point out this is my own invention, you heard it here first. The Dave Ramsey Paradox is as follows: “Advice like your grandmother gave but we keep our teeth in”. Plus, if you become good at handling your personal finances you can “Change Your Family Tree”. Let’s think on that. If you can “change your family tree” by handling money well and teaching your kids then every grandmother who gave sound money advice would have money responsible kids and in time money responsible grandkids. So if the grandmothers planted the family tree correctly how come so many people need to be pruned?
Obviously some lessons just do not catch on from one generation to another. Depression era babies see the world differently than do Boomers. Boomers do not see eye to eye with Generation X or Millennials and whatever generation comes next will almost certainly confuse all of us.
All that is to say my kids are not like me. We have outside pets which works great when your backyard has 800 acres of wooded wetlands to play in but they are city kids with indoor dogs? Really, dogs indoors? Who knew you could even do that?
And this is the problem you are going to face. You are going to drop a seven figure sum into your kid’s hands someday, and they are probably not going to share your values when it comes to money. Will it help them or hurt them when it happens? Well, what is the worst that could happen? We could look at another statistically large group of people who have had large windfalls and see how they have fared.
The news is not very good. Over one third of lottery winners go bankrupt some point after winning. It is counter intuitive that free money would cause people to end up in greater financial duress than they were before winning but one third is not a small statistical result. The correlation is clear and real. Also going broke is not the worst that can happen, “winners” also suffer higher rates of drug and alcohol abuse, divorce and suicide. It is pretty sobering to think that a “gift” of a large amount of money can have such unintended consequences.
But you could logically argue, and I would agree, that lottery players do not represent your kids. Lottery players tend to be over represented by the lowest 20% earners in the country. Your kids presumably will be at least average earners and probably higher since you are the focused achievers that you are. Maybe that alone will save them from the fate of lottery winners.
So what about the statistics of heirs to fortunes? Unfortunately they are not much better. In fact 70% of wealthy families lose their wealth in the second generation and 90% lose it by the third. So much for changing your family tree! Now those statistics are gathered from studying mega-rich families whose assets will probably exceed yours or mine but it still is concerning that families that know they will be handing down vast fortunes do not seem to be very successful at training their kids to be successful millionaires.
Maybe I have convinced you this is a real dilemma you will face someday and now I am sure you are expecting me to provide the kind of sage wizened advice that older folks like me are known for. Sorry, no help here at all. But I will tell you my plan. In my case it will all go equally to the three kids, zero restrictions. They are mature and while they may not be as frugal as I am the worst-case scenario is they will spend it and not have it for retirement or to hand down to their someday kids. That isn’t so bad and in fact I probably should have spent more of my money myself when I was younger.
On the other hand I have a relative whose kids haven’t proved themselves very responsible with money. He currently has no plans to leave his multi-million dollar estate to his kids because he fears how they would handle it. I suggested he perhaps set up a trust that only doled it out in small doses that were less susceptible to feeding undesirable behavior but I’m not really sure what his ultimate plans will be.
My kids are already adults and I know them by their lifestyles and actions. I cannot see the million dollar plus inheritances they will get someday being anything but a blessing in their lives. If you do plan on having kids, and yours may not even be here yet, and if they are they may be very young, you will have a long time to determine how to pass down your lifetime assets. There are a few other related questions that you will also want to consider if you haven’t. What will you do with your assets if you choose not to have children? How do you handle handing down money in a blended family? And very important who should raise your kids if they are left without parents while still young?
What is your plan on handing down money to your children?
My parents net worth is probably double mine. i suspect that most of their money will go to charity or the grandchildren. I’m ok with this. Money can really mess up a child’s upbringing. Much better to get the windfall once they already have set money habits.
The whole generational wealth thing really can compound if you had parents who were smart with money and you are that way too. I received a significant inheritance but I was already FI and it did not really move the needle for me.
My kids are still very young. I don’t necessarily have a goal to leave them anything. Meaning, if I can set them up for a successful life when they are children, I don’t feel obligated to “save” just to leave them an inheritance. That said, since you can’t predict when you are going to die, I’ll probably end up leaving them a large inheritance. I hope and expect that they are responsible with money as adults and will use any inheritance wisely.
I think almost all of us will leave a pretty big sum because our plans are generally conservative. To insure a 95% chance of success you also lock in a 67% chance of having double or more what you thought you needed to start with. On the other hand we are living longer so probably your kids will be fiftyish if not sixty by the time they get it and surely at that age they will have the wisdom to handle it safely!
We have 2 boys, ages 10 and 12, but I have thought about this “dilemma” from time to time. Preliminary plan is to gift them portions of their future inheritances in their early adulthood when the money will be most needed. Hopefully we would’ve raised them to be independent responsible adults, such that these gifts don’t become regular “economic outpatient care” payments that they rely on. I’m sure that this will be a balancing act. Only time will tell!
We, so far have only given the kids about $10,000 each and only did it one time. We have bought an occasional plane ticket to help one make a holiday trip home to see the rest of the family. I think it has merit to transfer some early but I also worry about the dependency aspect. I only inherited money when I was in my fifties, way past it making any difference in my life and I suspect the same will be true for my kids if they don’t get an inheritance until we die.
Part of what got me into the FI community was Googleing how to best invest $1M, from an off hand comment that I might inherit that much some day. I knew fdic insurance was only up to a certain amount so, do you split the money between some cd ladders etc?
I’ve since decided to target my own $1M net worth, and FI, with the hopes my parents live nice long healthy lives. I am maxing retirement savings and opened a taxable account. Go stock market and good returns over the long term! I’m targeting my next career direction towards location independent work, flexible schedule etc.
I’d also be ok with a trust giving me a ‘paycheck’ each month. My brother is more similar to me with money, and my sister isn’t great with it, so the future could be interesting if my parents net worth increases over the next 30 years.
In reference to bare naked ladies ‘If I had a million dollars’, I already have a green dress but when I cross the mark for myself, I may just need to have some kraft dinner.
As intentional as you sound I know you’ll end up with your own fortune to dispose of some day! And like me when you do inherit from your parents it will likely not have much impact on an already financially independent life. When he read my post my relative confirmed that he still has no plans to give his kids any of his millions when he passes. And that is a choice based on love and not anger. Money is simply a curse to people who cannot handle it.
I still play the lottery…shhhh don’t tell the others… 🙂
As they say, somebody is going to win! I hope it is you. I don’t see a thing wrong with it, I’m just too much of an engineer to think I’d ever win!
Thanks for writing such a well thought post. I have pondered on this issue lately since having our first child. The ideal scenario is that our children grow up to be responsible adults who are good with money, allowing the opportunity for any inheritance to actually continue growing and be passed down the generations. Our backup plan is to put everything into a Trust, but we really want to avoid this as it comes with costs and hassle. We are also investing a little money in his own name into tax-efficient accounts and pensions. We intend to keep doing this until he is 18. Hopefully, this will help him (and any other children we have) get into the habit of saving and investing.
It is a puzzling question because this community is used to making decisions based on math and past statistical data and there is no formula to tell you how your young child is going to treat money as an adult. You do your best to teach and raise but as a parent of grown kids I can tell you I know of families that have both super responsible and totally irresponsible kids that were raised by the same parents in the same environment with equal amounts of love. Even the ultra rich with all their resources do not have a spotless record of raising their already rich babies, or we might not have reality TV.
Part of my plan with my kids is gifting their max contribution to their Roth IRAs starting with their first summer jobs. Here’s why it’s a neat way to pass money to your kids while signaling all the right messages:
* It’s contingent on getting a job and bringing home a paycheck.
* It shows the power of patient investing and tax free growth.
* It’s a great excuse to talk to your kid about investing every year.
* It increases the probability your child will quickly jump on future matching opportunities, like an employee 401(k) plan.
* It puts your kid solidly on the path to a financially independent future.
The bottom line: I think funding (and even fully funding) your teen’s Roth IRA now is a lot healthier than plopping a large lump sum in your kid’s lap later when you kick the bucket.
That is an awesome plan! I did not think we had the money to do that at that age partly because I did not know all three of my kids would get totally free rides to college. If I had it to do over again and knew I’d be in the financial shape I am now I think I’d adopt your plan. You should write a post on that. The only real risk is that you are turning over a pretty goodly sum to a very young adult but you are so right in that it gets to them when they need it. Plus even if they do blow some of it that might be the very lesson that keeps them from financial mistakes later on. If you’ve already posted on that you should put the link in the comments, I’d love to read it! Thanks for commenting.
Technically, yes, they could pull out the contributions prematurely as young adults, but that’s a detail I try to keep under wraps and certainly discourage aggressively 🙂
Here’s the post: http://www.familyfinancefavs.com/2017/03/fully-fund-your-working-teens-roth-ira.html
That’s a great post, it is kind of like a practice inheritance. It will be sizable but not nearly as large as the future one, although in your case with five kids there are a lot of slices in that pie!