How to Keep Your Kids from Burning Through What You Leave Them
So many people want to leave money to their children, but they’re terrified they won’t be good stewards of it.
In the next 20 to 25 years, an estimated $84 trillion to $90 trillion in wealth will pass from Baby Boomers and the Silent Generation to their kids. It’s called the Great Wealth Transfer, but if parents aren’t careful, it could become the Great Wealth Squander.
Gen Xers (born 1965-1980) are the biggest spending demographic worldwide, with Millennials (born 1981-1996) close behind.
What do you think they’re gonna do with this windfall?
I’m a parent, and I’ve worked hard my entire life. I’m proud of my financial success, and I want to share it with my kids. But if you’re like me, you don’t want that generosity to be wasted.
So, how do you make sure that doesn’t happen? Here’s the plan:
Is the Kid a FORO or a FOMO?
There are two basic types of money personalities. A FORO has a fear of running out and is hyper-focused on the future. She is a saver, not a spender, and values financial security. A FOMO has a fear of missing out and is hyper-focused on today. He is a spender, not a saver, and values his AmEx Black Card.
The first step to protecting your wealth is determining whether you have a FORO or a FOMO child. I provide questionnaires for determining this in my book, Emotionally Invested, but you probably already know what you’re dealing with.
If the kid is a FORO, stop worrying. Your money is safe.
If the kid is a FOMO, keep reading. Odds are he’ll burn through his inheritance faster than wildfire through a scrub forest.
Confront the Elephant
A couple recently came into my office. The husband said their daughter was in credit-card debt, and he wanted to use money from their retirement account to bail her out. His wife was silent. So, I asked her, “Have you bailed her out before?” The answer was yes, many times.
The daughter was a classic FOMO. Her financial problems would never be solved with more money. Her problem was emotional, not numerical. I advised them not to rescue her again, but to have a frank discussion about her spending and suggest ways she could handle the debt herself (e.g., consolidating and refinancing it). They took my advice, and the daughter is doing better.
It can be difficult for families to talk about money, but when dealing with a FOMO child, it’s vital. Be constructive, not accusatory. Be vulnerable by sharing your own financial struggles. And use facts to support your advice. For example, when I’m trying to convince a FOMO to slow spending, I’ll tell them this:
Every million dollars saved generates $40,000 in retirement income. So, if you’re making $80,000 or $120,000 per year now and want to maintain that lifestyle after you retire, you’ll need $2 million to $3 million in the bank. That always gets their attention.
Don’t Show All Your Cards
When dealing with a FOMO child, never divulge how much money you have. Two things can happen if you do: They may start spending it now, or they may get upset down the road when they don’t get it all. I had this happen to a client. She left equal thirds to her two boys and her church. Her sons are still my clients, and they’ve never forgiven her.
Make the Transfer Conditional
If your FOMO child reacts to your financial advice like the characters in Peanuts when listening to adults (wah, wah, wah), it’s time to get crafty. Here are options for leaving them money, but with strings attached:
Set up a gift account through your advisor: You can gift up to $19,000 per year ($38,000 per couple) tax-free to the child. Have your advisor open an investment account for them, but (here’s the trick) ask that a younger team member supervise it. FOMOs learn better from peers. Just remember that you’ll have no oversight of this account or how the money is used.
Consider a single premium income annuity (SPIA): This financial product periodically distributes a set amount to the child after you die. It’s easier than a conventional trust, and you’ll be supplementing your child’s income for the rest of their life.
But Keep This in Mind
When all is said and done, you have three choices: 1) Squander your money; 2) Let the kids squander your money, or 3) Let the government squander your money.
Assuming you can afford it, I’m a big proponent of the first option. You know that first-class ticket you never buy? Well, guess what? Your kids will buy it after you’re gone.