Is an Initial Nest Egg Better than an Inheritance?

It was found from a recent Pew Research survey that about 36% of adults aged 18 to 31 were living at home with mom and dad.    This has been greatly hyped by the news, but really it isn’t as alarming as they make it out to be.  Digging deeper into the data, we see that 65% of 18-24 year-olds are living at home, but only 16% of 25-31 year olds.  Since a lot of the 18-24 year olds might be going to college or a trade school, it actually makes a lot of sense for them to live at home if they can (since the parents would typically be paying for an apartment for their adult children otherwise anyway while they were finishing school).  If more than one out of three adults were coming home from college and moving back into their old bedroom, that is more of an issue.

Looking at the longer term data as well, we see that a lot of young adults have always lived at home.  Back in 1960 32% of those aged 18-31 lived at home.  The big difference then was that those not living at home were very likely to be married (56 %) versus today (23%) where people are waiting longer to get married.  What the probably means is that a lot more young adults are going to college and then going into careers, putting off getting married until their careers get going.  No doubt the much more liberal attitude towards premarital and even recreational sex plays a role in this trend.

Still, there are certainly a lot of young people coming back home, having completed college and not found a job, or having tried to live on their own.  Others have not been able to maintain an apartment due to a job loss or their hours being cut in preparation for the roll out of Obamacare next year.  One of the biggest issues is that those  starting out have little or no emergency fund and also don’t make enough to build up an emergency fund very quickly.  Perhaps if they started out with enough money to pay for rent and food for six months to a year, they would be able to get back on their feet without coming back home to live in the spare bedroom.

Maybe instead of leaving a big inheritance for children when they are in their fifties and (hopefully) have built up plenty of money on their own, parents who have saved and invested enough to become financially independent in their forties should consider providing their children with starter money for their lives.  This could be done through gifts each year.  Currently the federal gift limit is $14,000 per year.   This means that parents could give their children up to $28,000 per year ($14,000 per parent).  (Although check with a CPA about this.  As the IRS says, this stuff is complicated.)  Start when the child is 15, and they could leave the house with over $110,000.  The investment return from such a nest egg would be something like $10,000 – $20,000 per year), meaning they would have plenty to fund a good portion of their living expenses for years if they get a modest apartment ($300 per month = $3600 per year)  and live frugally ($200/month on food = $2400 per year).

The idea here isn’t to create a trust fund baby that will live on the money for a while, eventually blow through it, and then come back in their mid-thirties looking for more.  The idea is to give them the cushion they need to get started in their careers.  By knowing they have the resources to spend a few months looking for a job, they can find a job that is right for them.  It will also help them in their lives to stay out of debt or at least limit it.  They will have the cash to buy a quality used car and avoid a car payment their whole lives.  Likewise, they’ll be able to put 20% or more down on a house, avoiding PMI.  All of this will mean the ability to keep more of their paycheck, increasing their ability to grow wealthy.

Of course, there are a lot of 18-year olds who can’t handle such a large sum of money.  They will blow it on stuff.  Some will find a boyfriend or girlfriend heavy in debt or with other issues whom they “know they can change” and give a large amount to them.  Some may even get sucked into a cult, get lost in an addiction, or just not  grow up and move on with  life because they think they can just live on the money they have.  The trick is finding out which ones can and setting up appropriate safeguards for those who can’t.  Some ideas:

1) Instead of giving away all of the money to them when they turn 18, continue giving them gifts as young adults.  There is nothing stopping you from giving them half of the money when they leave home and the giving them the other half over a few years once they graduate from college, turn 25, get their first job, or meet some other milestone.  This will force them to do the right things to succeed to get the additional money and also give you time to see how they handle the initial money you give them.

2) Instead of giving the money to them initially, set up a special account in your name, and then send them a check for a portion of the investment return for a period of time.  Show them that they can have cashflow from the money indefinitely if they just spend the interest rather than spend the principle.  This will also reduce the amount they have available to spend, making the need to get employed to add to their income apparent.  Once they are sufficiently mature, you can start giving the principle to them over a period of years.

3)  Start out early as teenagers and involve them in the planning and investing.  Rather than just investing the money and keeping it a secret from them, show them how to invest and have them help with the investment decisions.  Also, have them help with the taxes for their account each year, which will happen when the account value builds up.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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