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Early Retirement Extreme Forums » Money Questions

1. 

   jennypenny
   

   Expert
   Joined: Jul '11
   Posts: 1,338

   Most of you probably read Seeking Alpha, but in case you don't...

   http://seekingalpha.com/article/409101-how-to-allow-your-children-to-retire-young

   I find these articles interesting because this is an almost constant debate in our house recently. My DH is keen to pay for a traditional college education for our kids ($40K/year). I think--if you're going to give them that kind of money--my preference is to invest the $160K for them. It would finance half of the cost of a state college at 5% return and then they could use the $160K as seed money for ERE after they finish college. We'd still be out the $160K (which seriously delays DH's retirement) but I'd feel like the kids were getting the most out of the money.

   Posted 1 year ago #
2. 

   simplex
   

   Apprentice
   Joined: Sep '11
   Posts: 83

   Giving the money to retire early is one thing, however my view is that an education is far more important. An education actually lets you use the money (and not just blow it). However an education needs not to be a university education.
   That said I would (will) send my kids to university. I think becoming a grown up and having the possibility to study and interact with others freely in a university environment is a first class development opportunity.
   I did a Phd and Postdoc, and maybe I could have earned more starting to work at 16 as a carpenter and saving all my money, I think the odds are that that would not have happened. I really liked being at a university and got a lot out of it.

   Posted 1 year ago #
3. 

   Andre900
   

   Apprentice
   Joined: Mar '11
   Posts: 79

   There are tons of news articles all over advising potential college students to avoid the costly private colleges and head to the state univ or local community college. (The one exception is if you get accepted at Harvard, then go.) Moreover, don't waste time & money w/ an unmarketable degree.

   Roughly, tuition only: Private = $40K/yr. State = $10K/yr.

   Living expenses need to be paid no matter where the student goes to school, or doesn't go to school.

   Whatever happened to students paying for their own college education? Or get a degree through military service.

   Posted 1 year ago #
4. 

   Dragline
   

   Master
   Joined: Aug '11
   Posts: 959

   I'm not sure how interesting the article is given the selection bias of using a bull market period and a stock that was known to be a decent performer. What if the child's 20th birthday happened to be in February 2009 and he had invested a good portion of the early funds in Enron or WorldCom?

   But the larger college v. investment question is of course very interesting. Again, though, I am not sure its a question that could (or more importantly, should) be answered without knowing the specific child and what their aptitudes may be. Children who thrive in an academic environment should probably stay in one. But if you have a young, budding entrepeneur or saleswoman or performer in sports or the arts, they might be better off going in a different direction.

   One of the most important things I have learned as a parent is not to make plans for your children before discovering who they are.

   Posted 1 year ago #
5. 

   jennypenny
   

   Expert
   Joined: Jul '11
   Posts: 1,338

   I don't think I explained myself well in the first post (probably because it was 5:30am :)

   I think going to college is a good idea. No matter what my kids' interests are I will encourage them to go to college for 4 years. I think the experience is worth while. I just think that investing their college fund and letting them attend a less expensive college using the proceeds and money they earn or borrow sets them up for the freedom to pursue whatever they want afterward. They'll still have an ERE kitty to use for grad school, or living expenses to pursue the arts or travel, or anything else they desire. I think it also gives them more freedom to pursue a less-marketable degree if they aren't paying top dollar for it.

   I would prefer to just give them a smaller amount of money for college, but DH and I totally disagree on this.

   Posted 1 year ago #
6. 

   JohnnyH
   

   Expert
   Joined: Jul '10
   Posts: 1,363

   Smart, if obvious, investment plan. But what dragline said; data is convenient (or cherry picked).

   I'd be just as pleased (and more proud) if my kid(s) forgoes college... It just [usually] isn't worth the time, money, risk. The experience? Yeah, it's fun -but it's a fantasy, more like a sleepover at Hogwarts than the real world.

   Also, I'm not going to pay for their college. Simply because people often don't value what they don't pay for... And if they choose a stupid degree, or go into massive debt, they're out of the will! >:(

   xD

   Posted 1 year ago #
7. 

   Hoplite
   

   Master
   Joined: Dec '10
   Posts: 489

   On how best to allocate college money, of course always subject to the child’s personality, talents and opportunities, it’s generally better (jennypenny's position) to save money on undergrad where possible, reserving it for grad school (much better bang for the buck, career-wise) or other pursuits. Now if only the child will cooperate and go to State U. without threats of grievous bodily harm :)

   What bothers me about the article is it assumes that providing children with money (or investing it for them) works to their benefit. Beyond paying for college (sometimes) I have never seen this work out well; it’s like a siren song that will crash the kid on the rocks eventually. I know a fair number of people who live off of family money, and whether they went to college or not, not one of them has achieved much of a life. This becomes particularly painful as they reach their 40s and 50s. Just a few days ago, a friend, lifelong trust fund baby, managed to get fired from an unpaid volunteer position and is looking for something else to do to pass the time. Rather than helping, the money just creates dependency and a general lack of motivation or ability to do much of anything.

   Posted 1 year ago #
8. 

   bigato
   

   Master
   Joined: Mar '11
   Posts: 915

   hardship is what builds character.

   Posted 1 year ago #
9. 

   JohnnyH
   

   Expert
   Joined: Jul '10
   Posts: 1,363

   I think Napoleon Hill said unearned money is a curse, I think he might be right.

   I'm going to develop a complex and fun money game for my kids... Good grades (if I even send them to school;), excelling at something, impressing me, going out of their way, earning money will get them a cash bonus/matching of some kind.

   If they choose to invest, I will match the funds, if they cashout they have to pay penalty + tax... They can invest in whatever they want. Maybe they'll be retired by the time they're ready to move out... That would be pretty cool. :D

   Posted 1 year ago #
10. 

    george
    

    Journeyman
    Joined: Mar '11
    Posts: 211

    So what do we mean by retire. To choose how we live our life. Or to have the resources to be able to do nothing.

    I've seen too many kids with the baggage of financial means. I think along with it goes a chain of expectations.

    By all means save your money, but give the child freedom.

    Once upon a time there was a teacher who was approached by an industry that wanted to train apprentices in an area where trained professionals set up their own financially successful businesses. The teacher gave the information to parents of students who had voiced interest in becoming apprenticeships, every one of those parents said no, my child is going to university.

    I thought the university was a place you go to learn about things that interest you. Better to go when you're 40 than push yourself through and drop out or worse end up working in an industry you're not interested in.

    At one time people thought a university education opened the door to management, then it was entry level, then it's a phd. what next.

    The best thing a parent can do is spend time with their kids and understand what makes them tick. We're all born with special qualities and interests we develop.

    The understanding of this by parents often distinguishes the top performing students from the soggy middle.

    Hold on to your money. often they're too young to appreciate it.

    @hoplite agree
    @Bigato agree

    Posted 1 year ago #
11. 

    mikeBOS
    

    Master
    Joined: Nov '10
    Posts: 554

    As a counter to hoplite, I know a few trust fund kids, one in her late 30's now, the other two in their early 50's. And they are all great people. I don't know anything about their "work ethic", but who cares? They don't need one. They live fulfilling, interesting lives enjoying their hobbies and friends. One's an artist with a following, the other does real estate development for fun, and the other just seems to always be fiddling with his antique furniture collection most days. Though the high-profile, stereotype trust fund kid is Paris Hilton and drug addicts, I doubt it's the norm.

    @jennypenny I think you're wise to seriously consider the issue. "Education is the best investment you can make" maybe use to be true. But now that one year of tuition costs more than many graduates will even make in a year, I'm not sure that's as true anymore, purely on a financial analysis.

    Though, how you handle transferring $160k to someone who hasn't had to earn it and ensure they're wise enough to not blow it all, I have no idea. I mean, if you hand it to someone who's hell bent on attaining financial independence at a young age, no problem. But what if your kid just assumes he's going to work until he's 68 anyway, and just sees it as a windfall to blow on a car and a couple of trips? Or if you give it as monthly distributions it could just be used to inflate his lifestyle. Maybe that's not the worst thing in the world, but is it worth delaying your DH's retirement? Sometimes the apple falls far from the tree.

    Maybe be open about your intentions to help with college but keep your intentions about giving him the money secret. And if after a couple years of work he turns out to be a frugal saver, happily surprise him with your intentions. And if he turns out to be a spendthrift debtor with a small coke habit (Though I'm sure with your, what must be superb parenting skills, that is the slimmest of possibilities), you just keep the money for your own retirement or a promising future grand kid ;-)

    Posted 1 year ago #
12. 

    aussierogue
    

    Master
    Joined: Nov '11
    Posts: 341

    some great perspectives from Mike once again...

    Posted 1 year ago #
13. 

    J.O.S.H.
    

    Apprentice
    Joined: Mar '12
    Posts: 35

    I think the solution to this (which I believe I mentioned in this thread) is to setup an estate and have the estate transfer them the 1% every year. Presumably this isn't too much hassle.

    Posted 1 year ago #
14. 

    secretwealth
    

    Expert
    Joined: Jun '11
    Posts: 1,505

    Just a short counter to dragline: While it's true to criticize the choice, an investment in a decent ETF or Mutual Fund (were ETFs around in the 70's? I don't think so) could easily replicate these results.

    Posted 1 year ago #
15. 

    jennypenny
    

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    Joined: Jul '11
    Posts: 1,338

    C'mon Mike, doesn't everyone have a coke head phase?

    I hate the idea of just handing them money. but my DH (who's normally on board with the ERE thing) seems committed to financing their education. I just have a hard time thinking an undergraduate degree is worth more than $100K (and that it all needs to come from us). At least our oldest has a pretty good idea of what she wants to study (and an aptitude for it). And our youngest is on track to be 7' tall so maybe he won't need us to pay for his education if he's healthy enough to play ball :)

    Posted 1 year ago #
16. 

    ffj
    

    Master
    Joined: Aug '10
    Posts: 342

    I've seen similar discussions before in financial journals and books that I have read. Like Dragline, I hate cherry-picked examples, but to be fair to the author he did state that is the type of example he used. We can discuss all day long which vehicle or method to use to grow our investments but I think the larger question should be whether we should for our children, at least to such an extent.

    One of my hobbies throughout life has been to observe human behavior and what has been fairly consistant is the fact that almost nobody will do something they don't like unless forced. Like Mike, telling a child he only has to survive for so many years until he gets his pot of gold will ruin many a person. I think a better option is to give them the tools to prosper and then hold them to it. I didn't have much of a choice in my case but my children will have a safety net I never had, which quite frankly makes me nervous, because I don't want them viewing it as a crutch for not trying as hard as they should. With hard work and "deprivation" comes success and competence, and let's not forget respect, something one can never buy. It's such a balancing act and very individual as Dragline has indicated.

    Posted 1 year ago #
17. 

    Dragline
    

    Master
    Joined: Aug '11
    Posts: 959

    Yeah, I struggle with the "how much to give them" and "what to pay for" questions as much as anyone -- and the related "at what age should they be told how much we have". I've come to the kind of broad conclusion that if you have a child who shows individual initiative at something, you ought to pony up to help them reach their goals, but be stingy with the purse until they do.

    On a little more of a tangent, I wonder whether in this day and age it might be better for many kids to take a year or two off of school before entering college to work or with some other pre-approved plan or program -- i.e., not lying around at home. I had a niece who did this (she traveled with "Up With People" for a year) and it turned out really well for her because she was more focused when she got to college. And another one worked as a nurse's aid for a couple years before deciding to go to nursing school.

    In the professional area, I see many young college graduates who go work for law firms as legal assistants for a year or two before deciding on whether to go to law school. I think it makes a lot of sense -- and I have found they make much better associates if they have had that experience.

    Posted 1 year ago #
18. 

    jennypenny
    

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    Posts: 1,338

    @dragline--I've always loved the concept of the gap year. I think it's hard for kids though when all of their friends go to school and they do something different.

    @FFJeff--Like you I've never had a safety net, and I'm glad for it. My oldest brother and I were the safety net for our younger siblings and you can definitely see a difference. Now that we're in our 30s and 40s my brother and I are STILL their safety net.

    This reminds me of the old Bill Cosby joke. When someone told him that "cocaine intensifies your personality" Cosby asked, "yes, but what if you're an asshole?" I suppose money is the same way--it just intensifies your personality whatever it is.

    Posted 1 year ago #
19. 

    george
    

    Journeyman
    Joined: Mar '11
    Posts: 211

    I once had a cup of tea with a young chap who was working in a department store. He was about 17 and had left school. He told me he was doing this job until his Grandmother dies because she'll leave him lots of money

    I like the thought that my home is a safety net, particularly if a couple of young mothers I know end up on their own with the children. This is a simple home, but its stress free and safe. I really have sympathy with people in that situation, through no fault of their own.

    But I definately think it would be a case of this is a safe haven to help you get back on your feet, rather than money handouts. IMHO everyone should contribute in some way, or they can't stay.

    And I plan on leaving everything to the women in the family. This is becoming a family tradition, after a relative noticed that all the money was going to the males in the family to get an education. The women were sent out into the world with nothing. Its a tougher road out there for woman, no matter what we tell ourselves. I once read the personal wealth statistics for women, particularly single with children, and there is such a disparity,

    Posted 1 year ago #
20. 

    George the original one
    

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    Joined: Jul '10
    Posts: 1,938

    > I think a better option is to give them the
    > tools to prosper and then hold them to it.

    I'd go with this approach, too, if I had kids. The safety net is for discovering their passions while they're using the toolkit... let them explore art or music or social work or one of those fields that is unlikely to produce big bucks, but is very satisfying.

    Posted 1 year ago #
21. 

    BennKar
    

    Journeyman
    Joined: Dec '10
    Posts: 144

    This is a tough one I have tought about for some years. This will only be an issue for me in 10 years, so I have some time to fine tune this, but my plan is to let my son know that college expenses are on his head. However, if he graduates and gets a job, I will match his college loan payments in a Roth IRA (up to a set number of years - probably 10). This way he has a reason to push himself, try to get the lowest cost for college, and he can get a good start on a retirement fund for himself.

    Posted 1 year ago #
22. 

    chenda
    

    Master
    Joined: Jun '11
    Posts: 370

    If I had the means and children, I would probably set up trust funds for them giving them a regular modest income for the rest of their lives. FI is a great gift, but I would'nt delay my own retirement for that.

    I don't think the knowledge or expectation of money neccessarily risks spoiling them and using it irresponsibly. How they manage their finances is more to do with how they are brought up. Make them save up their pocket money for the latest toy rather than buying it for them, get them to open a savings account, dont over indulge them, don't bail them out when they make mistakes.

    I know of a trust fund couple in Australia, son and daughter of multi-millionaires with a modest income from the family. They decided to get the biggest mortgage they could get and custom built some vast monstrosity full of crap (they were keen to boast on facebook that every room had a TV and sound system built in, even the garage) Then the bank uped the interest rate and found they could'nt afford the payments. They asked daddy to bail them out, who I'm delighted to say told them where to shove it. So the every-room-has-a-TV dream house had to be sold, and they're back living in a two bedroom flat with hopefully a better understanding of the real world.

    I worked with another guy with a trust fund. He was a bit of an oddball; we worked in the dullest, date-entry job ever. I think for him he worked because it was his only form of social contact, he spent his weekends watching TV and eating takeaways and seemed to have no friends. He never bothered to cash his paycheques, they would just pile up on his desk till one day we persuaded him to take them to the bank. Accounts were enraged to find that ~£6000 suddenly disappeared from the company payroll. But the private income was irrelevent; it was just the way he was.

    Posted 1 year ago #
23. 

    aussierogue
    

    Master
    Joined: Nov '11
    Posts: 341

    I got squat help from my parents. Worked through university to pay tuition etc and i dont really care...

    My wifes parents have told us they will be spending all the inheritance...

    so we just get on with it..

    I think i will let my kids assume that they will be getting nada from us and then maybe (yes maybe) when they buy there first house i might just surprise them with the deposit or something similar..

    When we die my kids will split assets...simple i reckon.

    two keys here

    1. avoid the sceptre of a big inheritance seeping into relationships....it can distort things. Best everyone knows where they stand early. Start telling kids when they are in high school they better study / or work hard etc because they will need to fend for themselves

    2. how to stop people being angry if you are loaded (rich) and intent to spend everything.......especially if your kids are struggling big time and you are partying in aruba!

    great way to screw up a family dynamic...and it wont be about who is 'right' and who is "wrong". It will quickly degenerate into "haves" and "have nots"

    So there needs to be room to pinch hit with some cashiola if the circumstances dictate..

    Posted 1 year ago #
24. 

    wheatstate
    

    Novice
    Joined: Aug '11
    Posts: 13

    Thanks for sharing many good ideas.
    Below is my outline form of the financial education that I think a child should receive, and then I want the child to make the decisions.

    High School Financial Education:

    Share Rental finances; Learn repair skills, screen tenants, review applications, know mortgage rates, cash-flow, manage “emergency” repairs, learn professional communication, budget for big-ticket repairs.

    Create first business: Hourly job, babysit, Lawn mowing, computer work, tutor….

    Share economics of running house.

    Learn Craigslist/Garage sale and buying for 10 cents on the dollar.

    Learn economics of car ownership. Pay for ownership with own money.

    Pay for own cell phone.

    Post High school:

    Have child create “dream” life.

    Consider preferred living location, job hours/company/vacation, family.

    Chose college and career path to support this.

    “Give” child a rental house. They can live in it and manage roommates, and go to state school. Sell it and go to private school. Or live in it and pursue whatever. (This “give” is based on management approval. The deed stays in my name. The child has to sell “business plan” that the idea has merit and gets support of investors/parents)

    Having watched twenty-somethings burn through a trust fund while living beyond their means (think reverse-ere), I would not put a significant trust fund in a child’s name. Transferring $13k tax-free gift per year to a child is plenty.

    Posted 1 year ago #
25. 

    prosaic
    

    Apprentice
    Joined: Jan '12
    Posts: 68

    Having watched people blow through high-6 figure inheritances and transfers from parents, I don't think you really do your child a favor by setting them up for ERE. We have 3 kids and have given this a great deal of thought, though we don't have any specific answer. It's more that we know what we *don't* want to do vs. knowing what to do.

    *Earning* ERE is an accomplishment. Having it handed to you makes it just part of your life, an entitlement that may or may not be valued, depending on the kid.

    Posted 1 year ago #
26. 

    Boater
    

    Novice
    Joined: Sep '11
    Posts: 8

    Maybe this is not common but all three employers I have worked for since I graduated high school has a tuition reimbursement program. The first employer reimbursed 50% of books and tuition for any field of study, the second employer reimbursed 100% for any degree that could benefit the company (business field of study), and my current employer reimburses 100% for degree programs that benefit the company (business, engineering, chemistry). I did not start college until I was hired by my current employer (age 23) but I have a pretty high paying job relative to my skills and education level and had enough time to become mature enough to take college seriously.

    In the future when me and my wife decide to have a child we will not be saving for their college education but I will encourage them to find an employer that has a similar reimbursement program.

    Posted 1 year ago #
27. 

    HeOfTheMountains
    

    Apprentice
    Joined: Apr '11
    Posts: 33

    Interesting that you mention your DH wanting to pay $40k for kids educations.

    Watch this video.

    http://youtu.be/evJeAAJedbY

    Posted 1 year ago #
28. 

    JamesR
    

    Apprentice
    Joined: Apr '13
    Posts: 62

    A cautionary tale:

    My dad worked hard from when he was 11 years old and up, always doing part-time jobs to support himself and take a bit of load off his mom.

    Then, interestingly enough, he overreacted when raising me. He strongly discouraged me from working part-time (I wanted to start delivering flyers/newspapers @ 12). He said my job was to study and get good grades at school. (Uh.. what?)

    Yet there were no particular incentives for studying, and I ended up being quite the underachiever & procrastinator. I also never really developed much of a work ethic. During the middle of a deadline, I was more likely to go to sleep rather than finish the assignment.

    I also received a 2-3 year fund for university from my grandparents, but squandered it, and failed to graduate uni. I was handed a pile of money without any idea about the value of money.

    My thoughts:

    I think that ERE parents could teach their kids the value of working hard & the value of money. If you want them to achieve ERE, why not just match their savings $2 or $3 for every $1 they save?

    Go over the calculations with them, show them how much they need to save up to achieve FI. They can probably make $10,000 per year working part-time and/or full-time during the summer. From the age of 13 to 18, that would be $50,000 saved up. Match $2 for every $1 and that would be $150,000. Teach them how to invest, diversify, etc. Let them keep full control of their savings - and reward them when they achieve milestones.

    Another possibility is to pay them per hour of actual study time. However, it might be a good idea for them to get a taste of an actual job so they understand better what a deal it is to get paid to study. Sufficient grades would naturally result in scholarships and make university cheaper or free.

    Posted 2 weeks ago #
29. 

    Toska
    

    Journeyman
    Joined: Jul '12
    Posts: 129

    Why pay that much? If the kid wants college, they'll do well enough for merit scholarships

    I'm sorry. I'm just irked that I had a 1/2 ride to Michigan Tech Uni only to drop out my senior year because my parents wouldn't co-sign a cent over $7000.

    Posted 2 weeks ago #
30. 

    acorn
    

    Novice
    Joined: Jul '11
    Posts: 28

    I understand the reluctance and hesitation JennyPenny. I had the same feeling before sending both of my kids to college. It's an awful lot of money to participate in what is essentially a scam (it is my opinion that much of formal education is a scam) and the money spent would make a nice investment or downpayment on a home.
    I think you really have to have an honest look at your kids before a decision can be made. Both my children are academic so I told them early on if they wanted to go to college we would pay, but it would have to be a practical subject (meaning it would assist in becoming gainfully employed) and from a decent university. If money were not an object I wouldn't have narrowed their choices, but money is an object and I don't want to waste it so they can go party for 4 years and come out with a liberal arts degree. I told them if they want to study art, language, history, literature, etc. to self-educate and get themselves overseas somewhere and it would be as good, or better an experience as doing 4 years in college. I probably would have helped had that been the route they took, but they ended up both going to uni. I'm not knocking social sciences or the value of a liberal arts degree, but I do question the monetary value of one.

    As for enabling FI, I would, at some point, like to set up a a small trust for them. I think it was Warren Buffet who said, "enough so they can do something, but not enough so they can do nothing". I've known too many trust fund people who have truly wasted their lives. In any case, they don't know that is part of my long term plan and I expect them to work hard and stand on their own feet long before they have access to a trust.

    Posted 2 weeks ago #
31. 

    FarmOne
    

    Apprentice
    Joined: Feb '13
    Posts: 69

    Great thread! Especially for someone who has a kid in college.

    Why do we want our children to have the money and education we've got without suffering for it the same way we did? Tough love I suppose.

    Without earning what you get in life, you may develop that entitlement mentality we have seen so many times. Most recently, the occupy Wall Street folks we've seen on television with entitlement attitudes that spell out "C-O-M-M-U-N-I-S-M".

    Sometimes you don't get what you pay for. Buying an education without a means to an end is a great way to waste money. Past performances are not indicative of future returns.

    Who moved the cheese?!

    Posted 2 weeks ago #

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