[Editor’s Note: In 2023-24, our goal is to give a free copy of The White Coat Investor’s Guide for Students to every first-year student who’s in the medical field. But we can’t do it alone. If you’re a first-year MD, DO, DDS, Pharmacy, NP, or PA student, sign up to be a WCI Champion and get some free merch as a thank you. Even better, you’ll get your classmates and friends started on the path toward financial literary, something that could be worth millions of dollars. So, help us help you and become a WCI Champion today. You and your classmates deserve it!]
By Dr. Jim Dahle, WCI Founder
I get a lot of questions about the “20s Fund” we’re saving up for our children, and I thought this would be a good opportunity to talk a little bit about the inheritance that my kids will eventually receive.
Now, I expect there will be quite a bit left when we’re dead. I’ll probably keel over in my 80s, but I fully expect my wife to be a centenarian. So, that means by the time she goes, the kids will hopefully be retired and financially independent before they get any kind of final inheritance from us. Receiving money at ages 60-75 isn’t going to do them any good, and I’d like to actually do them some good.
Avoiding Economic Outpatient Care
In the classic personal finance book that I hope you have read, The Millionaire Next Door, Stanley and Danko spend an entire chapter describing how wealthy people ruin their children—both morally and financially—by giving them money as adults. I believe the data they compiled, so the key for me is to help my children without ruining them. I have spent a lot of time thinking about this, and this post demonstrates the plan so far.
My Children’s Inheritance: The 5-Point Plan
Financially speaking, I plan for my children to get their “early inheritance” in five different ways.
#1 Give My Children Financial Knowledge
One of the very best ways I will help my children is to pass along financial knowledge. All our kids learned early on that interest should be received, not paid. They know how a Roth IRA works. Our kids groan when I turn on Dave Ramsey, but they’ve gotten the message. As we drive around town, I point out to them all the businesses they own—you know, McDonald’s, Home Depot, Lowe’s, Disney, Chevron, etc.
The kids all have bank accounts, and they’ve had investing accounts for years. They know that there has to be money behind checks and credit cards. I have no doubt they will be unique among their college peers with respect to their financial knowledge. And that it is totally free to pass it on to them.
More information here:
Economic Outpatient Care and the Aspiring Millionaire Next Door
#2 Contribute to Their 529 College Funds
She’s not very good at keeping her feet dry while backpacking, but she can rock a future value function.
Most well-to-do parents try to save up something for their children’s educations. In fact, I have run into many of you who are planning to save up way more than I am for college. Part of that comes from the fact that my wife and I attended very inexpensive undergraduate and graduate schools, and our kids seem to be following in our footsteps. Part of it is the fact that I don’t intend to pay for their entire education. As I’ve written before, I expect them to contribute in several ways:
- Choose a reasonably priced school for their goals and abilities
- Earn merit scholarships
- Work during school and in the summers
They also will benefit from an education fund provided by their great-grandparents. Like the money I am saving up for them, that fund won’t completely cover their education, especially if they go to graduate or professional school. But combined with what I will have saved up and what they contribute, my goal is to get them out of their undergraduate educations completely debt-free and, if desired, through their graduate/professional educations with a manageable amount of debt.
The fund I am saving up for them is in the Utah 529 Plan, the UESP. It’s a great plan with low expenses, a state tax credit for residents like us, and both Vanguard and DFA funds. I invest the money in a very aggressive asset allocation—100% stock (50% international and 50% small value) for reasons I discussed more than a decade ago. For many years, we only contributed enough to max out the Utah state tax credit (about $4,000 per child per year), but then, for a few years, we put in $15,000 or so. Now, we’re starting to worry we’ve overfunded them given their educational plans, so we actually didn’t contribute at all in 2023.
#3 Invest in a UTMA/UGMA for Their “20s Fund”
The most useful time in life to receive an inheritance is in your 20s. That’s when you have precious little earning power, zero net worth (at best), and tons of expenses. Everybody thinks of college, but there are also summers in Europe, missionary work, a first car, a down payment, a wedding, and a honeymoon. For the professional student, there might be nearly a decade spent without a significant income. We decided to save up some money for this important decade to help our children. This fund will provide them with some unique opportunities and help them avoid starting out life heavily in debt, and it will allow them to make decisions from a different perspective than what I had.
Only 8 and a millionaire in training
For example, I was donating plasma in college to get by. When Katie and I were engaged and planning to get married just before my MS1 year, I was sick of being poor and did not want to drag my wife through the existence I had been enduring for the previous several years. I’m sure that factored heavily into my decision to sign up with the military for medical school.
I’d like to think that wasn’t my primary motivation. Certainly, I had some motivation to serve my country. I was definitely looking for an adventure (which I never really found in an environment where we weren’t allowed to leave a base in rural Chile for “security reasons”). However, there’s no doubt the idea of someone just handing me $920 a month throughout medical school AND covering tuition, books, and fees was very attractive, given that I had been living on $5,000 a year up until that time.
It would have been nice to have been a little bit more financially secure in my 20s. I think I would have made some decisions a little bit differently—hopefully for the better. Granted, there is a fine line between Economic Outpatient Care and financial security, but I don’t think our kids need to feel quite the pinch I felt just so they can be financially successful.
Their money is invested in a UTMA/UGMA account, also 100% in stocks. Our initial plan was to have something between $10,000-$50,000. Well, we became wealthier than we expected, and some of that wealth found its way into these accounts. UTMA/UGMA accounts, unlike 529s, become theirs as soon as they turn 21 (as early as 18 in some states). So, if they decide to blow it all on heroin, there won’t be anything I can do about it.
More information here:
When to Give Inheritance Money to Your Kid?
#4 “Parent Match” Roth IRA Retirement Fund
Every dollar my kids earn as children and teenagers goes into a Roth IRA thanks to the “parent match.” What’s a parent match, aka the “daddy match” or the “mommy match” or however else you want to term it? That means the money (babysitting, mowing lawns, teen summer jobs, etc.) they earn goes into the Roth IRA and I give them an amount equal to it to spend on whatever they like. That means we’ve got to deal with the hassle of their tax returns, but it’s totally worth it (and kids can earn a ton without paying much tax at all). Besides, it gives them a chance to learn all about the tax code.
All of my children were employed by this website for several years. You see those photos of them that have been all over the site for the past 13 years? You think they gave me their time and images for free? Heck no. The going rate for child models is $100 an hour. That’s $100 I don’t pay taxes on, $100 they don’t pay taxes on, and $100 that can go into a Roth IRA and compound for the next 6-8 decades (double that if properly stretched).
Roth IRAs are just too good of a deal to pass up. I don’t know how much money we will get into their Roth IRAs before they hit age 18. Maybe it’s only $10,000, but if it grows at 5% real for 50 years, it will be worth $114,000. And the lessons of investing from the very beginning are worth even more.
#5 Encourage Them to Own a Business
I can’t say I’ve actually started this one for any of them yet. But imagine a child whose college fund doesn’t consist of a fund invested in stocks, bonds, or CDs. Instead, it is a business.
Imagine graduating from high school with a business that pays you $5,000, $10,000, or perhaps even $50,000 a year of passive income. Maybe it is a rental property. Maybe it is a website. I don’t know. But what better way to “teach a person to fish” than to have a kid learn how to run a business in middle and high school?
There is no reason someone can’t be a high-income professional (or an artist, or a teacher, or whatever) AND an entrepreneur on the side. I hoped to plant those entrepreneurial seeds early in my children. Now with one out of the house (majoring in entrepreneurship) and one trying to get a YouTube channel going, I think we’re doing OK.
More information here:
How I Teach My Kids About Money
Teaching Your Kids About Investing with The Stock Game
Bonus Trust Fund
We also have a trust now (which we didn’t when this post first ran five years ago) and they’ll each get something out of that (although I suspect the lion’s share of our wealth at death will still go to charity). However, even if we keeled over tomorrow, they wouldn’t get anything out of that trust until they’re 40 (1/3), 50 (1/3), and 60 (1/3). So, they’ll be on their own for 20+ years, long enough that they can pursue any career they want, but they can’t stretch their 20s fund to cover it all and just do nothing.
At WCICON24, I’ll be giving a talk on Advanced Estate Planning and will be sharing strategies and more on our personal estate planning approach. You can still sign up to attend in person or virtually at wcievents.com.
What do you think? Do you plan to give your kids an “early inheritance?” How and why? If not, why not? What are you doing? Comment below!
[This updated post was originally published in 2019.]