Creating Wealth is an in-depth conversation between Bill Taber, an experienced financial advisor, and his millennial daughter about personal finance, investing, and financial planning.
Bill Taber is President of TABER Asset Management, a Registered Investment Advisor (RIA) and fiduciary firm located in Des Moines, Iowa since 1998. For decades, Bill has provided investment management services to clients, creating wealth, building wealth, growing income, and preserving capital for each and every client. TABER offers personalized asset management, wealth management, retirement planning, financial planning, and services such as 401(k) rollovers.
His daughter, Anastasia, lives and works near Washington D.C. She enjoys discussing finances and her cats’ latest antics with her dad.
Episode 13 - Discussing Finances with Family: How does Bill advise his clients when it comes to paying for adult children? What are the pros and cons of continuing to financially support children into adulthood? And for children, how important is it to discuss finances with parents, and when should that discussion begin? On the other hand, how do parents instill a sense of financial independence if their children know they can afford to pay for them without risking financial hardship? Bill provides anecdotes from his career and Anastasia compares the effects of family wealth on children to the fictional family depicted in the HBO show Succession.
For questions and comments, you can email us at askcreatingwealth@taberasset.com.
Anastasia: Welcome to Creating Wealth, I’m Anastasia.
Bill: Hi, I’m Bill.
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Disclaimer: The views expressed today are our own, solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investment strategy. The views are subject to change and are not intended as a forecast or guarantee of future results.
Anastasia: So Dad, as a financial advisor, how would you advise clients in paying for their adult children?
Bill: Well, first of all, let me say congratulations that as your father it's great to be able to talk to you about money. (Laughs) Because not every parent and child can actually do that and I've experienced that throughout my career.
Anastasia: Yeah, that’s pretty great.
Bill: I think the overarching concept--something that I’ve learned throughout my career-- is the concept of economic outpatient care. And this is something that was researched and written about by Thomas Stanley, the author of The Millionaire Next Door. The concept is economic outpatient care. The more a parent gives to a child, the less economically productive they are or they become. From the book, basically they say that those children who are the least productive in economic terms often receive the lion's share of their parents money and that has an effect - and what it does is it tends to weaken the child that’s weakest in being able to accumulate money for themselves and by giving less to the children that are able to be more productive, it strengthens them. Children who did not receive a lot of capital from their parents learn to overcome obstacles. They are given permission, so to speak, by the parent to face adversity. Parents that give money to help children overcome obstacles in reality can be cheated or sheltered or inoculated from the fear and the worry and the dependency that comes from receiving continual gifts from their parents. Does that make sense?
Anastasia: Yeah, I mean, it sounds like money can kind of create a dependency state for some children. And if you're always helping the child who needs money, then you're teaching them to rely on you rather than themselves. But then it creates this chasm between the other children, if you have more than one kid, who are more self sufficient, and so they get less attention. And then over time, they learn to never rely on you for money. So I can see that that could create a gap. I don't know if that can create issues within the family, maybe?
Bill: Oh, yeah, definitely.
Anastasia: But yeah, is that what you are getting at?
Bill: Yes, all the above, I mean, children receive a lot of financial help from their parents and are waiting in anticipation of the next gift. They don't flex their muscles, so to speak, they don't go out and look for ways to improve their skill set or to provide more service to others. They know that if they're short of money, and they ask mom and dad for it, that a gift will be coming. They really over time tend to believe that their parents’ wealth becomes their future income. And so if you can cause them to feel dependent, it can actually increase fear that they experience in their lives.
Anastasia: Increased fear? How so?
Bill: What it does is increases feelings of dependency. In other words, they are dependent upon their parents instead of their own abilities.
Anastasia: Okay, which is bad, because the parents are not going to be around all the time. So if they've learned this dependent state, and then their parents pass away, what do they do?
Bill: Yeah, well, they hope for a large inheritance. (Laughs)
Anastasia: (Laughs) And then hopefully don't spend it all at once.
Bill: I can give you an example from my career. There was a first generation individual that made a lot of money and built the wealth for the family, and then they had children. The children inherited the wealth, but they also--it was a part of a family business--and so they learned what it took to make the wealth because they were part of the family business that created it. But the parents' attitude was we had to work for this, but we didn't really have to if we didn't want to - so let's give some money to our children. In other words, the third generation, and the third generation basically now is between the ages of 45 and 63, and they are all dependent upon their parents for money. They never learned how to budget because they always got gifts when they needed it. As they became adults. They started running up credit card bills. It got to the point here recently where their mom took $150,000 out of her investment account to help the children pay off their credit card bills and said to them, "This is the last time I'm going to pay off your credit card bill." But they've never learned how to budget. They've always learned that if they needed the money it came from mom and and mom's attitude was, "I've got it. I should give it. Isn't that what a loving mother does?"
Anastasia: Hmm. It's wrapped up in feelings of this is what I am responsible for providing for my children, because I love them and I'm a good mother. But what really might be happening is that she's harming their ability to learn how to budget and not get into a lot of debt.
Bill: Yes, and undermining their own incentive to work and make efforts to make money on their own.
Anastasia: Yeah. So how is it that someone listening to this podcast can approach teaching their own kids?
Bill: Well, parents that have relatively young children, like, say, between the ages of maybe eight and 16, that tends to be the stage where they have friends, they have peer pressures, certain things come into play, and you may have a child that wants to have the latest technological gadget. There's an endless list of these gadgets that are coming on the market.
Anastasia: There always is. I remember with my brothers, it was all about the latest Nintendo gaming system.
Bill: Yeah, I mean, it's never ending. And so you know, as a parent, you think you're doing a wonderful thing for them by giving them the latest gadget. But then there's another one and another one and another one. So you know, one of the things you might do is basically to say, well, I'll pay for half of that if you work to pay for the other half of it. And so working as an eight to a 16 year old could be maybe just doing tasks around the house, it could be paying a small amount of money for doing things to clean up the house or mowing the lawn or doing things that are a benefit to the parents. And in the process they learn that by being productive and working, that they actually can make money and then spend that money for what they want. That teaches self sufficiency.
Anastasia: Yeah, I remember with one of my brothers. (Laughs) He just wanted so many new things that eventually you guys just told him to get a job.
Bill: Yeah, that could be the next step is that once they reach that age where they can actually go out and get employed, then they can make their own money and make a decision as to how they want to spend it.
Anastasia: Didn't he start flipping burgers when he was 14?
Bill: Yeah, his list was long.
Anastasia: I always found it interesting that he worked out that unmentionable fast food restaurant and then has never really eaten there ever again. (Laughs) After seeing what it's like on the inside. (Laughs) Yeah, so I don't know if you have a kid like that you tell them, "Well, there's only so many chores around the house that you can do and get paid for. If you want to spend hundreds of dollars on new computer equipment, then you're gonna have to go out and get a job." But obviously, that can only happen when they reach the age where they can't do that.
Bill: Mhm. Sure.
Anastasia: In terms of a younger kid, how do you begin to approach the topic of money with them?
Bill: Well, typically, birthday celebrations, gifts from relatives, etc, cash gifts, you start to teach them by saying, okay, that's maybe money for your college. And so you want to take that money and put it in a savings account, or you can say, part of it needs to go in for saving to the account, and part of it can be spent for something. And so they can then decide what it is that they want to do with those funds. But you establish pretty early on the habit of saving, and it goes back to our budgeting podcast, you have to spend less than what you make.
Anastasia: So one way to teach little kids would be to give them a piggy bank and teach them now I give you $1 you can save 50 cents of this towards a bigger purchase. Like if you want a Lego set. You can slowly save money over time. I mean, something that you did with us was you gave us weekly allowances that increased as we reached a certain age, you gave us a little more. So I think I started out at like $2 a week.
Bill: Mhm. Wow.
Anastasia: And then I ended up just putting a lot of it into a tin can because I had this grandiose idea that I was going to be able to afford a horse (laughs) on a weekly savings.
Bill: One can always dream.
Anastasia: So I had this horse fund and I think mom found it a couple years ago and it had something like $75 in it. (Laughs)
Bill: Did you transfer it to a new horse fund?
Anastasia: No, I did not. I think the horse fund has been pushed off even more. Hopefully before I'm retired though, it's gonna happen.
Bill: How about a question about when should a more elderly parent start talking to their adult children about how much wealth they have?
Anastasia: Yeah.
Bill: There's a lot of parents, I know this from working with individuals with their investments over the years, that don't ever have conversations with their adult children about how much money that they have. In fact, there have been cases where the adult parent died, and the children were clueless as to what they had. And that can be a bit of a problem to be that secretive. It can put a lot of stress on families, particularly at the time of the death of the parent. I can remember one situation where a family was told, "Dad's desk is in the basement, it's in an office, you stay out of that office." And that was strictly off limits. After the father passed away, they went into the basement and opened the desk. As soon as they tried to open the top drawer, it was very difficult to do. But when it did, all sorts of stock certificates started popping out. And this was an individual that basically had kind of a hoarding instinct that every time they bought some sort of asset like a stock, instead of keeping it in a brokerage account, where it's protected by SIPC protection, he kept it in a drawer in his basement. For a year and a half, the family kept finding things that he had squirreled away in different rooms and different desks, etc. And it was just a nightmare.
Anastasia: So they had no idea what he owned.
Bill: Yeah.
Anastasia: And then that probably made the process more protracted, because ostensibly they split it after his death?
Bill: Yeah, I can't remember what the will said, maybe it was all to the wife, or maybe part of it was to go to the kids. But just that process of having a will and saying, okay, who gets what property is actually called probate. And that's an expensive process. It's a drawn out process. And it gets delayed when the family has to scurry around trying to find out exactly what the parent owned. Not only that, it increases the attorney costs.
Anastasia: Oh no.
Bill: And it can increase taxes. Although with the change here a couple years ago, you have to have an estate above roughly $11.5 million to have to pay any estate tax. But for families that are in that situation, it's imperative that you do advanced planning, and talk with an estate attorney to have your affairs in order so that when you die, your family knows where to go, and how to find the information about what your assets are.
Anastasia: If you are an adult child of an elderly parent, how do you approach that parent to discuss this? Because I imagine the reason why they don't discuss it is because money can be a sensitive topic.
Bill: Well, exactly. How do you get started with that conversation? Some older parents won't ever have the conversation and that's unfortunate. Some will, and I think probably the key is the age of the child may vary, but generally, by at least age 40, the children are in a situation where they've proven themselves to be financially supporting themselves and have shown themselves to be financially responsible. Another way of saying that is that they've learned how to control their own expenditures. At that point in time, you can have a conversation and say, "Well, this is generally what we have, and this is how we believe it would be dispersed by a will, or a trust after our death." Part of that planning process and meeting with an estate attorney is to pick someone that is an executor of the estate, which is a fancy term for someone that's responsible for gathering all the information about what all they have, and then dispersing it according to the terms of the will. So it's good to have these conversations ahead of time so that there's not a lot of confusion and extra stress that's added at the time of the parent's funeral. One situation that I've seen is where there are multiple children and different personalities, obviously, different tensions, perhaps the parents may or may not decide to split their estate equally between all their children, which can cause stress, irritation between siblings. One thing that I've seen is that sometimes they have a third party executor, like someone that is maybe a CPA or an attorney that understands taxes and estates actually be the executor. So that if there's any disagreements or anger that the children basically can direct that anger towards the executor, not towards the other sibling, but again, it depends on the dynamic within the family. But I would say age-wise that generally by age 40 is a good time to have that conversation.
Anastasia: Okay, I think that we should circle back and discuss what are the pros and cons of continuing to support adult children.
Bill: What I've seen among parents once their children have graduated from high school and are out is that a number of them will provide for college education, because education basically sets them up for a potentially higher paying job.
Anastasia: Yeah.
Bill: I have one client that has two children, they were twins. One decided to go to law school, the other decided to go to med school. And this couple was a high income couple that was fortunate, they had saved $500,000 a piece for undergraduate, graduate medical school, law school, residency, you name it, so that those kids were able to come out of those programs in well paying jobs and not have any kind of debt. So that's one thing that parents will do. I've seen again, through my career, that the people that have been really successful are really productive economically, maybe didn't get any help from their parents. They had to, as we were talking about earlier, take that job at the fast food place when they were 14 and just continue to work and actually put themselves through school. That was easier back in 1972 to the 2000 period. Now, education costs have increased three, four or five times in price, and it makes it more difficult for a young person to be able to save and pay for their own education. But those young people basically learned early on to be productive and to control their expenses and to stay focused to pay for their education. And they come out of the college experience with that skill set and they become very, very productive in the economy. So I think that can be a plus. I've seen grandparents give money to grandchildren and there's a law that passed here about 15 years ago called 529 plans, which allows anyone to give money to a child to be used for college expenses. It doesn't have to be a parent or grandparent, it could be a neighbor, could be a friend, it could be anybody. So that also helps the children there. Where I think it's a con, where supporting children is a con, is actually what we talked about earlier, it weakens their ability to become financially self sufficient. It robs them of the self satisfaction of working and making money.
Anastasia: Yeah.
Bill: And it can take away their ability to feel a sense of financial independence, or of relying on themselves to get what they want or purchase what they want, as opposed to waiting for a gift to pay for it.
Anastasia: So I guess that leads into my next question of how do you instill a sense of financial independence, if your children know you can afford to pay for them without risking financial hardship?
Bill: Chicken and the egg question. That's probably the biggest reason why parents don't talk to their children about how much money they have.
Anastasia: (Laughs) I know you can afford to pay for this. So why aren't you paying for it? So then it becomes teaching your kids the importance of relying on themselves.
Bill: Well, let's use another example. Let's say that you're the children of Warren Buffett.
Anastasia: Alright!
Bill: Do you think that they probably have an idea as to how much money their father has?
Anastasia: They know exactly how much because he's listed in Forbes!
Bill: So his personal philosophy--I'm paraphrasing--is don't allow your children to inherit so much money that it kills their incentive to work and achieve for themselves. And so his philosophy has been, I'm going to give them a reasonable amount of money to be comfortable. And then he's already put a plan in place to give the vast bulk of his estate either to worthy causes or worthy charities. So his children know that the $80 to $100 billion that he has, that they're not going to be receiving that.
Anastasia: So do as Warren Buffett does, in this case.
Bill: Well, unless you want your children basically to be not productive at all, and be robbed of a sense of self satisfaction, and feeling dependent.
Anastasia: You know, what's funny is I just started watching this show Succession on HBO, and I don't know if you've heard what it's about, but it's a fictional media conglomerate family, and the patriarch is getting dementia, but also refusing to step aside. So his oldest son thought he was going to take over the business, but then finds out that his father has changed his mind. And partly, the father does that because his oldest son was a drug addict up until three years prior. I think the show's really interesting, just from the little bit I've seen, just because you see how children react differently to having this immense wealth and being spoiled in a lot of ways. And another one is definitely a jerk, based on how he treats people who don't have as much money. So it's interesting, because when you get to that level of wealth, then it becomes how do I make sure that the money doesn't corrupt my children?
Bill: Yeah, that's, that's what we're talking about.
Anastasia: Yeah. And so then looking at it on a much smaller scale, if you're not a billionaire, you're just someone who earns a decent living, that principle still applies, because you want to treat your children to view money in a positive light, to have a healthy relationship with money, as opposed to just expecting a handout from your parents whenever you get into trouble, whether that be credit card debt or something else.
Bill: So I'm thinking of another situation where I had a client who did not have a lot of money at all. A woman about age 62 had a brother that had passed away and had left her $60,000. And I was talking to her about the fact that you could take only about a 4% withdrawal rate against that which would be about $200 a month for that to be a sustainable inheritance from her brother. But she had some ideas, had some projects that needed to be done and over a period of 18 months wound up taking all the money out. And so at 63 and a half, she wound up with not much money, not any different than before she received the inheritance. So that gets to the fact that a lot of people don't understand that if you receive an inheritance, you can only spend a part of that to be able to continue receiving a sustainable income.
Anastasia: Yeah, don't spend it all in one go. I guess my final minor question: At what age do you think parents should start talking to their children about money?
Bill: Oh, I think early on. And as we spoke about, there are little things that the child can do to earn them money, or can take the money that they received from their relatives for Christmas or for a birthday and put it in a piggy bank and the savings account and start saving for something for the long term. I think that's critical, because what it does is it instills a sense of delayed gratification, which is not a typical human tendency. Delaying gratification is something that's learned. And flies in the face of all the marketing out there that says, "Here's the next greatest wonderful product and go get it now. Get it now. You deserve it. And if you don't have the money, well, we'll help you borrow the money to get it." So, yeah, having a discussion about money with kids early on I think is critically important.
Anastasia: Don't shy away from the topic just because your family might not have talked about it growing up.
Bill: Absolutely.
Anastasia: Great. Well, I think that should be the end of our episode, but I will encourage our audience again, if they had any follow up questions on this episode to send us your questions. We would love to discuss them. Did you have anything else you want to mention?
Bill: No, not today.
Anastasia: Great.
Bill: Thank you.
Anastasia: Thanks, Dad.
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Anastasia: Thank you for listening to Creating Wealth! If you liked our podcast, please subscribe and consider recommending it to your friends or leaving us a review on your podcast app. We would love to discuss your questions. You can email them to us at askcreatingwealth@taberasset.com. You can also find full transcripts of every episode on taberasset.com. That’s Taber with an “e” not an “o.” Thank you for joining us on the path to financial abundance. We’ll see you next time!