3609: How Much Should You Leave to Your Kids? by Darrow Kirkpatrick of Can I Retire Yet on Family Inheritance

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[00:00:59] This is Optimal Finance Daily. How much should you leave to your kids? By Dara Kirkpatrick of CanIRetireYet.com. How do you feel about legacy giving? Chances are you see the issue differently from your own parents. We're experiencing a generational change in views on inherited wealth. Parents of today's baby boomers, having lived through a world war and less prosperous times, were usually excellent savers.

[00:01:28] In their retirement years, their investment assets are a sideshow to their guaranteed defined benefit pensions. But that model they hand down of stockpiling investments until death, at which time their children receive a large inheritance, is looking increasingly dated to the next generation. It's different for baby boomers. According to MarketWatch, quote,

[00:01:52] Quote, 23% of pre-retirees would ideally like to spend all of their savings and let their children fend for themselves. In contrast, a mere 9% say they want to save as much money as possible to pass on to the next generation. End quote. Is that selfishness or just common sense? How much will you leave to your kids? How much should you leave?

[00:02:15] Many boomers have endured careers and a damaged economy. Others have lived inflated, debt-ridden lifestyles. Still others have spent heavily to educate and launch adult kids. All these factors have severely eroded the average boomers' net worth. What wealth they have available for retirement will be targeted at essential living expenses, with little earmarked for legacy giving. Entitlement.

[00:02:42] Those boomers with enough to leave substantial wealth behind may direct it to charity instead of family. The majority of affluent boomers made their own money and feel their kids are best off doing the same. But a few feel differently. Ink is spilled, fees are paid, and tax strategies are employed in an effort to maximize family wealth passed down to the next generation. Why do people instinctively want to preserve a large legacy as they age?

[00:03:11] Some of it is probably natural self-preservation, keeping a rainy day fund against an unknown lifespan. Some of it could be a subconscious desire to remain relevant to errors later in life. Easier to do when your net worth is substantial. Finally, some believe that legacy giving has the potential to transform death by making a statement about who they were and what they valued. But if we aren't careful, legacy giving plans may backfire.

[00:03:40] Sacrificing while raising your kids so that they can enjoy a better life is a time-honored and natural parental role. But what is the point of denying yourself in retirement so that your grown children can enjoy an extravagant lifestyle after you die? If they're in the middle of careers, a large inheritance could be downright destructive, undermining their motivation in life.

[00:04:02] This sense of entitlement that comes from unearned wealth can stunt growth, subvert meaning, and contribute to depression and destructive behavior. On the other hand, if children are much older, post-career, they probably don't need a large inheritance. Given today's lifespans, by the time you die, any children will likely be in their 60s and 70s, having already established a retirement lifestyle. How much difference will inheritance make to their quality of life at this point?

[00:04:32] Sure, a splurge or two might be nice. But besides serving as worst-case insurance and more investment dollars to play with, what's a large bequest going to buy that is essential to happiness? Expecting an inheritance. On the other side of the equation, what if you're expecting an inheritance? How should you plan? In most cases, I wouldn't factor an inheritance into my financial plan, other than perhaps as a hedge against other retirement variables.

[00:05:02] Unless your parents are so wealthy that they couldn't possibly consume their assets in any reasonable scenario, it's risky to base your lifestyle on the particulars of somebody else's fate, their health, their expenses, and their investments. Unfortunately, though, many working people do just that. According to MarketWatch, quote, nearly 20% are banking on an inheritance to completely or largely fund their retirements,

[00:05:27] while half say they expect to receive enough to provide them with some support in their later years, end quote. In my experience, the amount and timing of an inheritance are largely unpredictable. So in my own planning, I've been willing to informally balance a potential inheritance against other unpredictable events, such as a need for extremely long-term care, so that I don't have to insure against them all. But I would never count on an inheritance for essential retirement living expenses,

[00:05:56] such as shelter, food, transportation, or healthcare. Preserving an inheritance. And what if you've already received an inheritance? How does that figure into your own legacy giving? Many people feel an obligation to preserve and pass on at least the principle they've inherited to future generations, rather than consuming it themselves. But how do you implement that? Unfortunately, passing on wealth you received is complicated by the impact of inflation over long time spans.

[00:06:26] You'll have to give much more than you received in nominal terms if your goal is to preserve spending power for your heirs. Given the current investing environment, that could be difficult. One approach, if you don't intend to consume any of the income, is to put inherited money into a separate account with designated beneficiaries and simply pass on the entire ending balance. By contrast, if you mix the inherited assets with your own,

[00:06:53] then you would need to compute the inflated amount over your life expectancy and target that as your minimum legacy. This requires extra planning and attention, and still won't be exact, but it may be comforting for some. Buffett's Way How did the super rich handle legacy giving? Philosophies differ, of course, but Warren Buffett created a giving pledge to convince more of the world's super wealthy to leave a majority of their fortunes to non-profits,

[00:07:23] rather than to family. He advises the wealthy to leave children, quote, enough money so that they can feel they could do anything, but not so much that they could do nothing, end quote. In other words, Buffett suggests leaving children enough to provide freedom and a safety cushion without damaging their work ethic. The exact amounts are going to vary wildly depending on individual family capabilities and lifestyle. For Buffett, the sum is a few hundred thousand dollars.

[00:07:53] Ultimately, the point is to support adult children in leading healthy lives and finding meaningful careers, not to set them up for a life of leisure. Obviously, this may not apply if you have minor age children, children still in college, or a special needs child or grandchild who requires care for life. In the latter case, a trust that fully funds their care and living expenses would be justified. Finding Balance

[00:08:21] Misunderstandings come easily in family estate planning. The best way to ensure intelligent allocation and amicable distribution of an inheritance is regular, open communication about a family's goals and needs. Meeting in person is best, but if geography or relationships are difficult, then annual written communication would be advisable. Ultimately, as one of your last acts on earth, legacy giving is an intensely personal decision.

[00:08:48] Options could vary between leaving kids very little and leaving them millions. And there is a balanced approach. Leave what you yourself inherited, and if needed, add enough to create an emergency fund, a family insurance policy that can see errors through a spell of career or health difficulties. This ensures that the essential needs of future generations are met, while not so enriching children upon your death that they can inflate their lifestyles or ditch meaningful careers.

[00:09:18] Finally, if you're in a position to give to the next generation, you might gift at least some of that money earlier in life. If there are clear needs now, education, housing, charity, why not meet them sooner than later? Why delay generosity? Ideally, you've raised your kids to manage money wisely. If you gift while you're still alive, you can experience the joy it brings to family and others. You can see how they handle the responsibility.

[00:09:46] And you may even realize certain tax advantages. The bottom line is that leaving a modest inheritance to children can help to ensure and free their future, but leaving too much or giving at the wrong time can distort and even harm their lives. On the other side, getting an inheritance is never a sure bet. Better not to anchor your retirement planning on a hypothetical bequest. Managing a financial legacy is a difficult and personal process without a perfect prescription.

[00:10:16] But one thing is certain, the current generation must and will do it differently than their parents. You just listened to the post titled, How Much Should You Leave to Your Kids? by Dara Kirkpatrick of CanIRetireYet.com. My philosophy with money? It's a tool for freedom, not a source of anxiety. Wealthfront helps you tune out the noise and earn more on every dollar with a high-yield cash account and sophisticated, easy-to-use investing products.

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[00:12:11] There's no place like Chrome. Check responses set up required. Compatibility and availability varies 18+. I've always found it interesting when people talk about leaving an inheritance for their children as a financial goal or priority. Don't get me wrong, I get the whole idea of wanting to give your kids a leg up in life, but I'm just not convinced that handing them a bunch of money is the answer. I also agree with Darrow that we should never expect an inheritance.

[00:12:38] I know more than a few people who have mentioned their inheritance as something they're really banking on, But I have to imagine that it's somewhat disempowering to have your financial future dependent on something that you can't control. The stats show that the majority of millionaires, 79%, did not receive an inheritance from parents or other family members. Instead, they achieved millionaire status through hard work and smart financial choices.

[00:13:06] Also, an Ohio University study shows that an astonishing 33% of all beneficiaries squander their entire inheritance within two years of receiving it. Maybe we shouldn't lose sleep over leaving a massive inheritance for our kids at all. I mean, instead of focusing on leaving behind a huge financial legacy, perhaps we should be more invested in leaving them a legacy of values, principles, and skills. Money can come and go,

[00:13:34] but teaching them how to navigate life, handle adversity, and make smart choices, that's something they can carry with them forever. While I'm still not entirely sure about the whole inheritance thing, I'm thinking maybe it's not about the money after all. Maybe it's about the life lessons and the values we pass down that truly make a difference in the long run. And that will do it for today. Have a great day and weekend. Thank you for listening. And I'll be back here tomorrow where your optimal life awaits. Let's see.