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Your food support post got me thinking about how I feel about supporting myself, i.e. self-reliance. I think it’s fair that you receive help, that’s why it’s there, no shame in that. So what I’m about to say isn’t intended to contradict the idea of food support or project anything onto your situation, it’s just my own internal perspective.
Probably my number one goal in life is to ensure that I will not need food support and that no one in my family will ever need food support, for generations to come.
I’m not saying we need to be the Vanderbilts, wealthy beyond imagination and not needing to work. I’m talking about having a firm foundation for self-reliance, autonomy, and opportunity. It’s about being ahead of the curve financially rather than digging out of extreme debt or relying on the government.
Can I actually build a family legacy of self-reliance for generations? I think so — or at least I can get close with the next couple generations — if I can achieve three milestones.
HOW TO BUILD A GENERATIONAL FAMILY LEGACY, IN 3 STEPS!
This sounds like a dumb how-to list but I actually believe this:
- Avoid the worst-case scenario via estate planning.
- Save for retirement.
- Provide for the kids’ higher education.
Step 1: Avoid the worst-case.
Immediately after the twins were born, Mrs. Rich and I took the following actions:
- Increased our life insurance.
- Set up an estate plan, including the following:
— Family living trust with named successor trustees; financial power of attorney; medical power of attorney; designated guardians for our children; pour-over will.
We literally sat in a conference room with an estate lawyer and 2 newborns to set up our family trust. I don’t remember anyone crying, so the kids must’ve liked what they were hearing.
Basically, no matter what happens to me and Mrs. Rich, our estate plan ensures our kids will be taken care of financially from the age of zero through their higher education. A living trust — which I strongly recommend to anyone with young kids — avoids government involvement (via probate court) in distributing money and appointing guardians for our kids. It also gives us control over how our assets (life insurance proceeds + everything else) would be used, especially if the kids are too young to receive the money directly.
For example, our plan stipulates that the guardian (a family member we named) must use our money for the health, welfare, and education of the kids. Another family member (who happens to be a banker) must do an annual review of how the money is spent.
As for the kids, they would not receive any money directly until they are older. They get 50% of whatever is left at age 25, and the other 50% at age 30. Why start at 25? Science, of course! Age 25 is when the prefrontal cortex, the rational part of a human brain, is fully developed. Also, at age 25 the kids should be done with college.
I would not leave a couple million dollars of life insurance to teenagers! Their brains would have a hard time handling it, and the money would be more likely to mess them up than to help them. I love this paragraph in our estate plan:
Strong work ethic, productive and contributing member of society. Legally binding. I love it. No, kids, you can’t use your inheritance to buy a boat. Talk to the Trustee.
We could even stipulate that the children must graduate from college to get any dough, which is maybe a good idea, but I’m getting ahead of myself here. I’ll talk more about college later.
Step 2: Save for Retirement
Now that our family is shielded from financial catastrophe, our next step in building a legacy for generations is saving for Mr. and Mrs. Rich’s retirement. Why? Well the obvious reason is we’ll get old, and either we won’t be able to work or won’t want to work anymore. But doing this wisely also has to do with the next generation. Our goal is to provide for our kids, not for our kids to provide for us. I’ve changed their diapers, but I don’t want them changing mine!
Our retirement accounts include the usual suspects:
- 401k. We each max these out every year and receive a 5% match. Last year we added more than $70,000 to our 401k accounts.
- IRA. We don’t quite max these yet, but I plan to do so next year.
- HSA. I’ll be starting this in 2018. I’m filing it under retirement because it’s for long term health care expenses. As a bonus, it’s fully tax deductible and portable.
- Pensions. We both have pensions but I won’t go into them here.
- Social Security. My plan is to be ok without it. It’s gravy.
For retirement, I make my projections based on an ultra-conservative estimate of 2% growth per year. If we earn more, great. If not, fine. The point is, I don’t want to be optimistic when trying to determine if I have enough to live on in the future. I want a rock solid nest egg.
According to my projections, if we max out the 401ks and IRAs, we’ll have nearly $2 Million in retirement accounts at the beginning of 2033, just after my 57th birthday. Effectively, this replaces our life insurance. I was exactly on track in 2016. Cool, eh? Here’s the chart.
Step 3: Provide for my kids’ higher education.
Here’s the key generational step. I think higher education is the key to a family’s long term stability, and it creates a positive feedback loop for the future.
I should mention something. I “followed my heart” and studied theology at a very inexpensive college and an even cheaper grad school. Then I studied French in Paris on a shoe string, which led to my career at age 26. I had some help from my dad but also worked all the way through to graduate with no debt. (Actually, I paid a “loan” from my dad back at a rate of 4%!). One semester in grad school I had 3 jobs. I take pride in the fact that I went from small town farming to theological study to my career, which, by the way, has nothing to do with farming or theology!
So if all this turned out so well for me, after I didn’t have much help or go to expensive schools, why would I save $100,000 or more for my kids’ higher education?
A few reasons.
First, my personal story is pretty weird. While there was no question I would go to college, I really wish my parents had taken more of an active role. I had no idea what I was doing, and I thought some higher priced prestigious schools were closed off to me. My wife reminds me all the time that as a small state valedictorian I probably could’ve gotten a full scholarship to Harvard. (Note: my class did have 350 students in it, so I wasn’t the valedictorian of a class of 10 :). In my parents’ defense, they didn’t know any of this either.
In grad school I was able to take 4 classes at Harvard as a visiting student, and I loved it! The challenging courses, the smart classmates, the mind-expanding environment — it was exciting. So I’m not imagining I would’ve enjoyed Harvard, I know I would’ve enjoyed Harvard. Because I did.
I like my weird story, but I also think I missed opportunities to meet my potential by not having a plan for college and grad school. I want my kids to be aware of all the opportunities available to them.
Second, the cost of education has skyrocketed. It’s more and more difficult to graduate without debt, as you know. I don’t want my kids to spend half their working lives paying interest to a bank when I can help them. I don’t plan to give them a blank check — they still need to apply themselves and work hard — but the days of flipping burgers to pay for college are over.
Third, and most importantly, the value of education is higher than ever. The Great Recession revealed that those with advanced degrees are most protected from economic trouble, they have the tools to bounce back.
Study after study has shown that education is the key to long term earning power, employability, job quality, and self-sufficiency. The unemployment rate for those with a bachelor’s degree and above is less than 3%, as seen in this chart:
Higher education levels also correlate consistently with better health (higher exercise rates; lower smoking and obesity rates), lower crime rates, and lower divorce rates. Not surprisingly, career and money problems often lead to divorce.
To me, that last point is critical. Education level impacts relationships. People with a high education level tend to marry other people with a high education level, to positive effect. They tend to have friends with high education levels, and they have kids who are more likely to attain high education levels. You become like those around you. Wash, rinse, repeat.
It’s a positive generational feedback loop.
You might say that if people are intelligent, they don’t need a certificate to prove it. Sure, you can be super smart without going to college. But I should note that none of these studies were based on a person’s intelligence. These studies were based on the level of degree attained. Yes, the piece of paper. It doesn’t matter if someone is a knucklehead with a Master’s — that knucklehead still has a better chance at a positive outcome. It’s a system, in some ways it’s a game, but it’s the only game in town, and it has real consequences for life.
In Christopher Hitchens’ memoir, Hitch-22, his mother had a great line about why she insisted on sending him to an expensive university. Here’s the paragraph:
But Yvonne cherished her first son and determined that his years would be fuller and richer than her own. Thus, despite the family’s rickety financial situation, she insisted that Christopher attend pricey schools: “If there is going to be an upper class in this country,” she told her husband, “then Christopher is going to be in it.”
Now I’m not saying the highly educated class is perfect, but consider the alternative. The gap of inequality is widening, and it’s more important than ever to avoid being stuck without opportunities for social mobility and improving quality of life. How many friends do you have with no college degree who are doing really well? And how much harder will it be for their kids to meet their potential and pursue their dreams?
The bottom line of all this is that my final step in building a family legacy will be to have robust college funds for my boys. I’ll worry about exactly how to give them the money later. It depends on their interests and aptitude and school choices. Whatever their path, I want to help them see the educational and career opportunities they have, just as I’ve helped them see 10 countries in 5 years. They are lucky and have advantages in this life, and I want them to live it to the fullest.
I plan to get started this year. I will do this using the following accounts:
- 529 Plan. Includes a nice state tax deduction. I’ll start at $500 per month and increase over time.
- My own cash flow — if they need extra help when the time comes.
So, it may sound hokey, but I think building a multi-generational legacy is achievable. I’ll be greatly increasing the odds of positive outcomes for my boys, which in turn increases the odds for my grandchildren (if I’m lucky enough to have some). Maybe someday I’ll be able to save for them too!
What do you think? How do you plan to guide your kids toward higher education and career goals? How would you build a family legacy?