Don’t Give Your Kids An Inheritance, Give This Instead

What Can Be Better Than An Inheritance? A Personal Matching Program

Getting an inheritance can be a good thing – or a bad thing.

While Millennials may wish their inheritance will someday pay for their retirement, that may or may not happen. According to a 2018 Charles Schwab Study, more than half (53%) of young people ages 16-25, “believe their parents will leave them an inheritance, versus the average 21% of people who actually received an inheritance of any kind.”

And, if they do receive an inheritance when they are close to retirement, that may not help them. It turns out that one out of three Baby Boomers who received an inheritance spent it within two years, according to research conducted by Dr. Jay Zagorsky, Senior Lecturer at Boston University Questrom School of Business, based on data from the Federal Reserve and a National Longitudinal Survey funded by the Bureau of Labor Statistics that studied the period 1985-2008.

A Better Option: A Savings Program With A Kick

Wouldn’t it be a better option to help youthful members of the family set up a savings program with a kick to it – a match that you arrange to ignite interest, leverage time and boost returns through compounding?

Let’s say your son “Steve” is a 20-year-old college student who lives at home with you. Steve has a part-time job during the school year and works full time over summer breaks.

Steve hasn’t developed a rule set for saving money. He is not eligible for a 401(k) at work. He is not thinking about a far-off retirement, but he believes he might benefit from a nice inheritance, probably just when he might need the money when he retires.

As Steve’s Mom or Dad, you know better. You’d like Steve to learn how to become financially secure in his own right.

Let’s Make A Deal

Here’s how you can help. You make a deal with Steve:

“For every dollar you save, I will match you dollar-for dollar for five years. But there is a catch. My match goes into a retirement plan for you, a Roth IRA, that you must agree not to touch until you retire someday in the far away future.” 

That gives Steve something to think about. If he saved, say $500 a month of his own money, he would have $30,000 of savings in five years. He would also have an additional $30,000 funded by his parents in a Roth IRA that he would agree not to touch. Nothing wrong with that deal. . . But what about the constraint on not using that Roth money until retirement?

Maximizing Roth Limits While Avoiding Gift Taxes

That $500 monthly ($6,000 yearly) figure is magical.

It is the maximum ($6,000) that can be contributed to a Roth IRA per year, the annual limit for funding a Roth, according to the IRS.

It also happens to avoid a gift tax obligation (the parents’ match is a gift). Since $6,000 is well under the $15,000 annual exclusion, Steve’s parents would not be subject to gift taxes for funding the Roth. (Read “IRS Announces High Estate And Gift Tax Limits For 2020.”)

Will Steve Accept The Offer?

For Steve to see the full potential of the matching program, you’ll want to show him what the Roth can accomplish over the decades between now (age 20) and age 65, a period of 45 years. The Roth will need to be invested for long-term capital appreciation potential. The best way to do that is through a simple S&P 500 Index Fund.

What If The 45 Years Turn Out To Be Terrible Markets?

This is where history comes in handy.

For skeptics, we can look at the worst performing 45 year market periods since the 1920s. For the optimists, we can review the best. While history will not repeat itself exactly, history does provide a frame of reference.

Let’s go back in time to see the worst outcome for a five year program of monthly investments in an S&P 500 Index Fund with a 45 year horizon.

That 45-year period ended with the Financial Crisis (1963-2008).

Had Steve started his five-year, $500 a month program ($30,000 invested) at the worst of times, his age 65 value would have grown to $1,192,643, an average annual return of 9%.

What If The Next 45 Years Turn Out To Be Terrific Markets?

If Steve had lucked into the best 45 year period (1946-1991), he would have had $4,368,046 at age 65 (highest 45-year holding period), an average annual return of 12.4%.

What If Returns Are Just Average?

What about the median return (1931-1976)? Steve would have had $2,421,743 at age 65, an average annual return of 10.9%.

What If Steve Wanted Safety Over Capital Appreciation?

If Steve had been very conservative, he may have considered the safest option, a money market fund that tracked 90 day T-Bills. The best 45-year period for money market funds (1956-2001) would given Steve an age-65 retirement nest egg of only $356,519, a 6% average annual return.

You can see these comparisons graphically in the chart below.

The point is this: Steve can’t control what type of market he will experience. But history can give him a frame of reference.

Is Steve Convinced?

To accept his parent’s matching proposal, Steve needs to see the benefit of investing in himself (and having others invest in him through the match). His interest needs to be ignited through the math behind the market, the math that leverages time and boosts returns through compounding.

Your Role As A Parent

As we approach the holidays, there will be opportunities to get together with young adults in your family. Why not impart some sage advice – in fact, not just once, but as often as possible.

Your Advice

Start saving now in a Roth IRA. Fund your 401(k) at work as soon as you become eligible; contribute each payroll period without stopping until you retire; maximize your match. Choose investments based on long-term capital appreciation potential. Take advantage of the math of compounding. And, if a parent or family member is willing to match your savings, go for it.

Survey Question

After reading this post, what is the likelihood that you will make a Roth matching proposal with your child, grandchild, niece or nephew? I’d like to know what you think. Click here to take a quick survey.

Look for my next post on what happens when someone in Steve’s position starts contributing to his 401(k) at work.

Follow me on Twitter or LinkedIn. Check out my website.

I got my start on Wall Street as a lawyer before moving to money management more than 25 years ago. My firm, Jackson, Grant Investment Advisers, Inc. ( of Stamford, CT, is a fiduciary high-net-worth boutique specializing in managing retirement portfolios. I approach investing with a blend of optimism (everyone can do something to improve their financial situations) and a dose of healthy skepticism (don’t invest unless you understand what can go wrong). These themes describe my “voice” whether on-air (NBC Nightly News, CNBC, NPR) or presenting (AARP, AAII, BetterInvesting) or in print. I began writing in earnest in 1996 (You and Your 401(k), an investor’s view of 401(k)s). Recent books are: Retire Securely (2018), offering concise action-oriented insights for retirees, pre-retirees and Millennials (Excellence in Financial Literacy Award “EIFLE”); The Retirement Survival Guide (2009/2017), a comprehensive tool chest for all financial levels and ages (EIFLE Award); and Managing Retirement Wealth (2011/2017), a guide for high net worth individuals (EIFLE Award). I’ve written over 1,000 weekly columns (Clarion Award, syndicated by King Features). When the time is right, I comment on SEC rule proposals.

Source: Don’t Give Your Kids An Inheritance, Give This Instead

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Life After Forever 21: How To Reduce Your Personal Cost Per Wear


Forever 21, the fast-fashion retailer that filed for Chapter 11 bankruptcy in late September, announced this week it will be shuttering 200 stores—a fourth of its total worldwide. For a time, founders Do Won and Jin Sook Chang, who established the company in 1984, brilliantly capitalized on American teenagers’ taste for flocking to the mall and buying the latest fashion—-on the cheap. At the company’s peak, they had a combined net worth of $5.9 billion.

But times changed. Foot traffic to malls has declined. Moreover, some Millennial and GenZ consumers are pushing back against fast fashion and looking for more sustainable ways to dress.

The appeal of fast fashion has always been the ability to dress stylishly at a low cost. But dressing sustainably doesn’t have to break the bank—particularly if you think of clothing costs on a Cost Per Wear (CPW) basis. After all, while fast fashion items may be trendy, they’re not exactly known for durability.

Here are five ways to move on from fast fashion, without breaking the bank on a CPW basis.

1. Start Buying “Investment Pieces”

If you’ve ever pulled some new fast fashion find out of the washer to find it’s shrunken, discolored, or otherwise unwearable, you know: Cheap clothing means cheap quality. Fast fashion is inexpensive up front, but it makes you continuously pay to replace defunct items, meaning your overall savings likely diminish (or vanish) over time.

Instead, start purchasing “investment pieces,” or higher-quality clothing items (which often means more expensive) for your closet staples.

If you’re struggling to justify a $100 work blazer, do the CPW math in your head: Divide the item’s total cost by the number of times you expect to wear it. For example, if you wear the $100 work blazer twice a week  (or 100 times per year, assuming a two week vacation) that means the cost per wear is $1 per wear—-if it only lasts a year. Assuming it lasts two years, you’re down to a $0.50 CPW. That’s the same CPW as a $25 blazer that lasts six months.

You get the idea. A quality blazer could end up with a lower CPW than the cheap version.

Today In: Money

2. Take Advantage of Rewards, Cash Back and Loyalty Programs

There are ways to save on more costly clothing items—-not only looking for sales but also being strategic in how you pay for purchases.  Using a cashback rewards card, for example, will give you instant savings. The Citi Double Cash Back card, for example, grants 2% back on every purchase.

If you really want to maximize your savings though, you could super stack your purchase with an online cash back portal, like Rakuten (formerly eBates) which can sometimes offer as much as 10% cash back while shopping.

You could even take it a step further by enrolling in specific stores’ loyalty programs—-which are making a comeback. After a certain amount is spent at the store in a given time period, you could be eligible for a discount on your next purchase. The North Face’s loyalty program, VIPeak, rewards members with 10 Peak Points for every $1 spent online and in retail stores. Points can be redeemed for discounts on purchases.

Read more: The Best Cash Back Credit Cards

Read more: Loyalty Rewards With No Credit Strings Attached

3. Don’t Shy Away From Consignment

If you don’t frequent thrift and consignment stores, let me tell you a secret: You’re missing out.

I used to be someone who hated thrifting—not because I’m too pompous to wear secondhand clothes, but because giant thrift stores overwhelm me. After moving to New York, however, I’ve learned that they are worth the extra effort (and hour) to sort through their massive collections.

I recently bought five cashmere sweaters for $3 each. Last year, I managed to find a vintage little black dress by Dolce & Gabbana for $80—with the tags still on. If you take the time to really dig through those racks, you can find high-quality clothing for low prices. (Just imagine the CPW on those sweaters!)

4. Sell Items You No Longer Want

Fast-fashion contributes to the appalling amount of clothing discarded each year. According to the United States Environmental Protection Agency, the main source of textiles in municipal solid waste is discarded clothing; in 2015, it comprised 6.1% of total waste that year. Synthetic materials found in this clothing can take hundreds of years to biodegrade.

If you buy quality items, and at some point they no longer suit you, you can sell them.

Apps like Poshmark, OfferUp and Facebook Marketplace make selling unwanted goods a breeze. I personally use Poshmark, mainly for its convenience; instead of having to coordinate busy schedules with someone, I just pack up the item and drop it off at the post office instead. (This convenience, though, does cost money: Poshmark takes a cut of your sale.)

Old jeans too worn to sell? Recycle them at Madewell and the retailer will give you a coupon for $20 off a new pair, while turning the denim into housing insulation. (Look for more such initiatives as the fashion industry confronts its sustainability problems.)

5. Rent One-Time Outfits

Special events usually call for one-time outfits. As ridiculous as it sounds, be realistic: Things like wedding guest and formal gowns are often worn just once.

Instead of spending hundreds on one-time outfits—and then letting them collect dust in your closet—consider renting these pieces instead. Online services like Rent the Runway and Le Tote pride themselves on sustainable fashion. For example, a $750 Badgley Mischka gown can be rented on Rent the Runway for only $130. Most offer monthly memberships, too, which means you can swap out trends in your closet for a fixed cost each month.

Since many consumers are renting a single item, in theory, the demand for clothing production will lessen, which makes these items “sustainable.”  (A new peer-to-peer rental app in England aims to take this one step further by arranging for customers to rent each other’s clothing, so no new items are bought by the service.)

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I’m a personal finance writer on the Money and Markets team at Forbes. Previously, I covered personal finance at other national web publications including Bankrate and The Penny Hoarder. I’ve been featured as a personal finance expert in outlets like CNBC, Yahoo! Finance, CBS News Radio and more. When I’m not digging up the best ways to manage your money, I’m out traveling the world. Follow me on Twitter at @keywordkelly.

Source: Life After Forever 21: How To Reduce Your Personal Cost Per Wear

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