Reaching financial independence requires a consistent set of skills and persistence. The habits that allowed you to amass a sizable nest egg don’t die just because you pass some arbitrary border. Education, job, and family life consume all your time in the beginning.
After college it is time to earn a living. After finding a job it is time to climb the ladder, all the while saving a massive percent of your income to reach your financial goals.
Family is a priority. A significant other and children take time and money. You increase your saving and investing skills. Raising a family is expensive only if you don’t know how to shop. You hit the rummage sales and thrift shops for kid’s clothing, toys, height chair, car seat and other stuff the youngsters will grow out of quickly. Later you sell the kid’s stuff for about what you paid for it at a rummage sale of your own, passing the same opportunity you had to another young couple.
And then it happens. Your hard work, intelligent spending and diligent saving pay off. You reached financial independence earlier than planned. Now you have another problem you never gave much thought to before: your legacy. If you reach financial independence early, how large will your net worth grow before you leave this world?
Thinking about your legacy when you are still in the building stages is hard. It requires looking into the eyes of the possible: early death. What happens if you die while the kiddos are still minors? A plan is needed. Even if the kids are grown, a plan of succession is necessary. And what if kids are not part of the picture? Then what happens to your legacy? Let’s explore the possibilities.
Ruining a Good Man
The worst thing you can do is have no plan. The second worst thing you can do is drop your entire net worth on your children the moment you are no longer there to provide guidance. The younger the children are the more damaging the impact of a sudden load of money falling in their lap will be.
Bill Gates is one of the richest people alive. He and his wife, Melinda, have stated they would not leave their entire fortune to their three children. The number commonly reported is $10 million. I think $10 million is still too much to leave to the kids.
The negative effects of large sums of money received by someone without the skills to manage it fill the newsfeeds. Sports figures, musicians and lottery winners are perfect examples of how often things go wrong when too much money shows up too quickly. There must be a better way.
Spread it Out
Money came fast for people like Bill Gates. Yet, somehow, Gates managed to remain productive without throwing his life away on cheap booze, wild women and drugs. It sounds funny to say it, but so many people who come into inherited money or fast riches via a sports contract give us ample examples of what will usually go wrong. For the sake of brevity I will refrain from too many examples. If you need more evidence just read the sports or entertainment news for three or four minutes. Shouldn’t take longer than that.
Many successful and wealthy business leaders handle the obligations of significant money better than other groups receiving a windfall. There is a reason for it. Much of the wealth business leaders acquire comes slower than you think. Most start out with very little money and build from the ground up. Elon Musk, Bill Gates, Warren Buffett and Steve Jobs all built from the ground up.
Money started pouring in for these men as their business plans grew and expanded. The difference between them and people gifted large sums of money is they had something to do and the money was more of an illusion. The net worth of a business owner is in large part the value of their company. Gates received a salary from his corporation and he held lots of stock in the company, a company without a dividend in those early days. Going on a four-year drug induced party was not in the cards.
My own story has a similar tone without reaching the lofty financial heights of the uber-rich. Coming from a poor family money was always a concern. Financial independence was a powerful dream. Then one day I tallied my net worth for the bank while seeking financing for a real estate purchase. I was floored when I saw the numbers. Even valuing my real estate and business conservatively, it was clear I crossed the seven figure threshold a while ago. I didn’t feel different! I kept thinking, This is it? I felt the same as I did yesterday and the day before. I did not feel rich. I felt like me; the way I always did.
And that is how larger nest eggs are formed. When you don’t walk around feeling and acting rich you continue to amass a larger and larger fortune. If you inherit a sizable sum before you earn any real wealth yourself you might actually feel rich and start acting it. This is the perfect formula to start destroying the legacy.
My Legacy Plan
My two daughters already know they are not getting dad’s stash. I think the $10 million Gates is giving his children is too much. There is no need to work or do anything of value if you have $10 million. Drop the whole thing into an index fund and you get $200,000 in dividends per year. Dividends grow about 7% a year, some years more, some years dividends drop, but the trend is consistently higher. And those dividends are qualified so they are taxed lower. I don’t know about you, but $200,000 is about eight times what I need to live a year.
My girls know from an early age dad is not giving them a free ride. Should I die early, my girls will not see a penny until they reach age 35. Then they get 1/15th per year to age 50. By that time if they haven’t figured it out I can’t help them. There are contingencies for a first-time personal residence purchase and for higher education. And I do mean limited: $10,000 for a first-time home purchase and no more than $10,000 for higher education. The education portion is limited to $2,500 per year and they must be full-time students to get it. The American Opportunity Credit could double that amount for them. The rest they need to find on their own. The first test of going to college is getting there. Dad footing the bill is not learning how to get to college.
There is one more point I forgot to mention. My girls will never see seven figures from their dad. One million each is as far as I will go. Even this is enough money to sit on your ass all day and end up a useless piece of protoplasm. The greatest legacy I can leave them is knowledge. This blog is part of that knowledge and part is the daily interactions and advice I give them. It is more than enough for them to achieve reasonable financial goals.
Life is More than Money
I hear you gasp! But it is true. Money is easy to get once you understand how it works in our capitalist society. Teaching spending habits is more important than ever as mass media gives the wrong answer consistently and insistently. The more commercial media you consume the poorer you will be.
It goes further. Once you reach a certain level of financial security you need to start living. For some this means traveling. Others want to continue growing their business. You may have a dream of helping people so work in a non-profit might be what lights your fire. Our differences are what make us stronger as a species. More money is not the driving force anymore.
If you hate your children drop your entire pile of money on them at once. The odds they will crash and burn rise exponentially. Your children will never need to learn or grow. Money will be there to pick up the pieces until either the money runs out or the drugs and alcohol takes their life. Regardless, their live will have been meaningless.
You love your children as I love mine. I want to protect them from harm. Therefore, I teach them how to fend for themselves, even if they hate me at the time for not funding their perceived dreams. They know I can snap my fingers and make it happen, but what has been learned then? Giving my kiddos experiences they can carry through life is far more valuable than any money I leave them. Money salves many wounds, but knowledge to do it on your own is a far more powerful a gift.
Where does the Money Go?
If only a fraction of my money goes to the kids, where does the rest go? For me, charities will receive the remainder of my legacy. My children are lucky. They were born in a home filled with love and possibilities. Not everyone is nearly as lucky. My life’s work will help more than just my children. My kids get a small fortune of cash and a massive fortune of knowledge. To those who do not have the same opportunity I leave you with the remainder of my financial legacy and this blog.
As ideas come to mind I will share my thoughts. I will not always be right. Parents can be that way. Clients ask these questions a lot so it is easy to keep a steady stream of posts related to wealth coming.
You and the girls will have to wait for your financial legacy. My legacy of experience and knowledge are here for you to read. The Wealthy Accountant is giving you your inheritance early.
Wednesday 4th of March 2020
Love everything about this. Kudos to you, my friend!
Friday 26th of May 2017
I agree with most of this, the one part that causes me pause is the college part. I guess because my parents paid mine I want to pay that forward, so I signed over my Post-911 GI Bill benefits to them and put a small amount (LT 6% of what we are investing in taxable/retirement, in the end they will have a little over 100k to go to school on) into a 529. The crushing debt that a lot of kids are graduating with is not something I want to burden my kids with.
Friday 26th of May 2017
Daniel, I agree with you on crushing student debt. If there is a way to get the kids to feel they have earned the right to go to college it will help them invest in the process. Not all kids look a gift horse in the mouth. Too many do, hence my advice. Having money set aside for college is a great idea as long as the kids don't feel entitled. College is work! Make sure the youngsters understand that. It is not a free ride! Money is one issue; the massive learning workload another.
Monday 6th of March 2017
The 1/15th per year plan is brilliant for another, rather sad reason. I had an estate lawyer once tell me that if your kids receive their inheritance while they are married, then they divorce, their ex spouse is entitled to half of YOUR money. I imagine this varies from state to state but just imagine that nightmare!
Monday 6th of March 2017
Unless the money is never commingled. Good luck with that. In 99.99999% of cases this is true because the money is mixed with other marital property.
Monday 6th of March 2017
Keith - Would you dole out the 1/15th once a year or further split it into monthly or twice monthly pieces? I can argue that one either way - once a year lump sum is great to look forward to, pay off any debt or diasters that crept in over the year, or invest it. It's also tempting to just blow it on a big, unnecessary purchase. Monthly seems like it would very easily get rolled into the routine bills and encourage dumb spending and lifestyle creep: "Well, I was going to buy a Honda but since we have Dad's money I think I'll buy a big BMW, and look! We can finance it over 9 years so we don't have to use any of our own money!"
Monday 6th of March 2017
Mine is set up for annual payments. I figure by age 35 they should be smart enough and by age 50 there isn't much more I can do to protect them from themselves. The reason for annual is easier administration.
Tuesday 21st of February 2017
How timely! My wife and I have only a few short months until this issue really becomes all too real, so I've been mulling over this exact question a lot lately. I like the idea of paying out 1/15 every year between the ages of 35 and 50 - I'm guessing this is based on years of working with clients who have made both good and bad decisions with their heirs.
I hope you don't mind if I ask - what mechanism do you have in place for this? Do you have a will / testamentary trust? If not, what do you recommend?
Tuesday 21st of February 2017
Most clients love the idea of 1/15th from 35 to 50; the kids not so much, but it is for their own good.
I have a business so I do things a bit differently. A Revocable Living Trust combined with a pour-over will should do the job for most people. BTW, the living trust I mention are sometimes called I Love You trusts or A-B trusts.