Financial Planning for Grandkids
Let’s discuss some of the wisdom that grandparents can impart to grandkids; as we all know, when those grandkids get to a certain age, they’re not listening to their parents anymore, but they sure will listen to you. There’s a certain amount of wisdom that you are perceived to have and that you probably have, and those grandkids will listen to you. So, you make a great teacher. If you have grandkids, you automatically carry, in their mind, assumed credibility. More importantly than that, you have lived through a lot of financial ups and downs.
I don’t care if you’re wealthy, if you’re really behind the eight ball and you haven’t saved enough money, or if you’re right in the middle. You have amazing financial lessons that you have learned whether you experienced it yourself or observed other people throughout your life. When you’re imparting wisdom to your grandkids, don’t just give the technical side of things. Make sure you’re telling stories, preferably stories about yourself. You’ll be surprised at how much they remember it.
My mom and dad have been gone now for a little while, but I remember when my kids were in their younger years, my parents would tell them things and they still remember that today. 10 to 15 years later, I hear them repeating those things. So, use that leverage that you have with your grandkids to teach them different things.
The Importance of Saving
Let’s talk about basic savings and not borrowing. When we brought up our kids, we made them all work in the beginning. They all worked in Johnson Brunetti as we were growing as a company and I remember one of my kids once made the mistake of saying, “Oh, we’re going to work at the sweatshop,” which was a big, beautiful office space with air conditioning. So, Wendy and I decided the next week he’s going to go work at the pizza shop and wash dishes and show him what he was really missing out on. The important thing is that we made all our kids work and we taught them to save money. Did we teach them to save money or did my dad, their grandfather, teach them to save money? Because again, they would listen to my father a lot quicker than they would listen to me.
So, one of the things you can teach your grandkids is, “Hey, save money! Save it right off the top.” You’ve heard my rule of thumb before; I like to say to save 20 percent. If they can start that when they’re young, that will carry out throughout their lives. When they’re younger, they don’t really have the ability to borrow money.
However, talk to them about the dangers of borrowing money, getting in over your head, and being a slave to debt that you have. Whether it’s car payments or house payments that are a little too high, maybe they bought houses that were too much for them, and so on. Obviously when they’re younger, they’re not in that position, but they might remember that wisdom when they are older and making financial decisions. Share with your grandkids your opinion on education. Have an interactive discussion about college, trade school, having marketable skills, and so forth. They might be at that age where they’re starting to lose a little interest in school and it’s important that you, as a grandparent, talk to them about education.
There are a lot of things that people don’t know where they can help out their grandkids. We get this question all the time from our clients, “Hey, my grandkids are getting closer to college age (or maybe they’re 10 years old) and I want to help save money for their college education. What’s the best way to do it?”
One of the great ways to do this is something called a 529 plan, which many of you have heard of. A 529 plan is an investment program, typically with mutual funds in it. You can put money into that, and it grows tax-free. All that growth, if it’s used for higher education, is tax deductible when it comes out. That can be used for books, tuition, lodging, dorm rooms, and so on.
For example, if you put in $10,000 and it grows to $20,000, you never have to pay taxes on that extra$10,000 of profit as long as it goes to college education. So, 529s are a great way to save for college.
There are other types of savings. There’s something called a Coverdell IRA where you can put money away for a child or a grandchild. There are also custodial accounts, that many of you’ve heard of, where you put money in and it’s in the name of the child, but you control that as a custodian. However, I think the biggest winner for saving for college education is that 529 plan.
There is another loophole around the gift tax rules that a lot of people don’t know. Many of you know that you can gift a certain amount to people outside of your spouse, if you’re married. You can gift that amount without having to pay any gift taxes on it and typically it’s about $15,000 that you can gift per year.
The loophole is that it does not apply to college tuition, so if you write the check to a college, you don’t have to pay any gift tax even if it’s, say, $50,000. So, there is an exception to gift taxing. You can’t give the money to the child, but you can pay their tuition directly.
So, it’s important to share this financial wisdom with your grandkids so they know about the importance of education. Share your personal stories which I think are so important and of course, think about how you can help in the most tax-efficient and most growth-oriented way to help pay for that college education.
Give Your Grandchildren a Head Start
Now, let’s talk about what kind of a legacy you can leave your grandkids, whether it’s now while you’re still alive or whether it’s later.
Let’s discuss the right now. One of the things that my mother-in-law did was when each of the kids graduated from college, she gave them a check for $10,000. Now, here’s the key. She didn’t actually give them the check. She gave me the check, we opened an account, put it in their name and I put it in some investments. I just told them Grandma Sue gave you this money because you graduated from college. She’s going to do this for each of your siblings and I put it in an account and it’s going to grow and you want to try to leave this money alone as long as possible. It’s not for spending, but if you ever need a down payment on a home or something like that, it goes towards that. And that was just a wonderful gesture that she made to our kids, and that’s something you can do for your grandkids; give them a little bit of a head start.
There are a number of ways you can do this. Again, when my mother-in-law gave that money to my children, we set up an investment account, just a simple brokerage account, and we bought mutual funds inside that account. She actually can set up a Roth IRA for kids if they have earned income. The key with the Roth is that money grows tax-free and it comes out tax-free, but they’re supposed to leave that money alone until they’re 59 1/2.
So, again, there are a number of different things you could do. You could buy them a CD. When interest rates are high, CDs are kind of popular. I’m not a big fan of CDs for long-term savings, but that’s certainly an option if you like CDs or if you like having money at the bank.
One of the things that I think is really neat is, if you know of companies that they know of, also buying them a few shares of stock can teach them a lot about how ownership and companies work. When you own a share of stock, you own a piece of that company. Whether it’s Disney or Coca-Cola or Facebook or Google, just pick some company that they would know of, and you can teach them not only about how ownership in a company can grow wealth over the long-term, but also how business works.
Maybe you even show them how to read an annual report from a big bank like J.P. Morgan like I’ve done with my kids, even though they didn’t pay a ton of attention. You show them that annual report and say, “Hey, this is how business works.” Some of you might not understand everything that’s in those annual reports, but it’s something you can do to help jump-start their long-term savings.
When my kids graduated college and they got their first jobs, most of them had access to a 401(k) or my son that’s in the Marine Corps had access to what’s called the Thrift Savings Plan, which is basically the government’s version of a 401(k.) I sat down with them and I had them sign up to put away 15% of their income in those plans, and then I helped them choose the mutual funds and told them about the dangers of switching funds around too much.
The bottom line is I help them get started and that’s something you can do. Maybe you can do something like giving them 50 cents towards their own personal use for each dollar they put in their 401(k.) Some of you that are more well off, maybe you set up a trust fund for your grandkids and maybe that trust fund is supposed to last throughout their lives and maybe they don’t get all the money until they’re 45 or 50 years old. In the meantime, you could instruct the trustee, and that trustee might be you, to send them a stipend every month. Maybe it’s $500 a month, maybe it’s $1,000 a month. One of the other ways you can help them is to help them make a down payment on a home. Now I’m mentioning a lot of things and I’m not telling you to do one of these, I’m just giving you suggestions on ways that you can help your grandkids get a fresh start and also to teach them about money.
I love the idea of buying a few shares of stock in a company so that they will understand how wealth is really built in the United States, which is through ownership of businesses. Some of us don’t have the opportunity to directly own a business, but we all have the opportunity to buy a few shares of stock in a company that we understand.
Almost everybody has an iPhone. If I think about our office, we have about 46 employees. My guess is all of them have a phone, and probably 45 out of the 46 have an iPhone. Apple is a great company to buy a few shares of stock in, and they will understand, “Oh, now I own this company that makes this stuff that me and all my friends use.” You can really teach them a lot about business that way. Going back to what I mentioned earlier, I think the most important thing that you can impart to your grandkids is that incentive to save money. Maybe you tell them that if they save 10% or 15% off the top of their paycheck, you’ll match little bit of it.
All we want to do is help our grandkids get a head start and these are some of the ways that you can help them.
Leaving a Legacy
Lastly, let’s go over leaving a legacy once more – a legacy that you can leave for your family and grandchildren.
Wendy and I really have been blessed as people that have lived way below our means. We’ve always saved a lot of money, and it ends up that we have more money than we need for retirement, so we’ve set up trusts for our kids and grandkids. Right now, we only have one grandchild, but we anticipate having more, so we’ve got trusts set up for our kids and grandkids that they can get some income off of in the future.
Some of our money will also go to charity, and this is another great way for you to leave a legacy. You should communicate with your kids and with your grandkids the values behind your planning. It’s not about the planning, it’s not about the trust, it’s not about the gifting; it’s the values that you want to impart to them because there may come a time in life where they have friends that are financially irresponsible, maybe even your kids were not the best financial stewards of their money, and you want to impart to your grandkids that wisdom and those values that you have.
You can not only impart your wisdom and your values to your grandkids, but how to help save for college education, how to get started working and saving money from their paycheck. It’s so important that you help teach those lessons to grandkids, tell them stories, and give them practical ways to save. Then, when it comes to that legacy, share your values.