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Pay Dirt is Slate’s money advice column. Have a question? Send it to Athena, Kristin, and Ilyce here. (It’s anonymous!)
Dear Pay Dirt,
What are your thoughts on leaving your children a “legacy”? My wife and I (late 50s, four kids, empty nesters) recently changed our life insurance agent due to his retirement. The agent served us for close to 25 years. The new agent had us fill out a financial/retirement survey to help serve us better and get to know us, and scheduled a meeting.
The agent told us our retirement plan was just “OK” and offered/informed us of some services and investment options they offer. We have the main house we raised our family in, and two rental houses. I have two 401(k)s and a small pension. My wife has a 401(k) and a bigger pension. Together we have $250,000 in cash/investments and we are adding to this due to being debt-free. I plan on retiring at 60 and start collecting my pension. He suggested that when I retire, in addition to the pension I should draw off from my smaller 401(k) first and hold off on collecting Social Security until later. My wife plans on retiring at age 62 and he had the same advice, 401(k)/pension, hold off on Social Security. We plan on downsizing in the future and selling the family house (approximate value is $550,000) and either buying a smaller retirement home/condo or moving into one of our rental houses and investing the extra.
During the meeting he suggested having us carry more life insurance, which is understandable, the previous agent did this, and it is their job to sell more to “protect for the future.” However, he seemed to be focused on the amount we would be able to leave as a legacy to our kids. I received about $100,000 from my share of my parent’s estate that we paid our house off with. My wife’s share of inheritance, if and when her dad passes, would be about $15,000 to $25,000. Some of our friends and family received little or nothing when their parents died. So anything, we feel, received after a parent’s death is a bonus and not an expectation. The agent was really focused on what we were going to be able to leave our kids after we die and to have another policy (the one we have is a first to die) to ensure our kids get something when I or my wife dies last. What are your thoughts? Yes, it would be nice that our kids would get something, and unless we have a major financial problem, they should get something. But should we have a life insurance policy just for that purpose?
—Leaving a Legacy
Dear Leaving a Legacy,
You’re already building a wonderful legacy for your children: the gift of self-reliance. Nowhere in your letter do you mention that your kids need money or are begging you for it. They may still go through hard times and you may be able to help them through. But, they now know they can power their own lives and legacies. To your point, if they get some cash to go along with that, fine, but leaving a financial legacy doesn’t guarantee they’ll think of you more fondly after you’re gone.
Also, don’t discount that you’re potentially building a substantial financial legacy for them right now. You have a primary residence worth $550,000. I assume that it’s either entirely paid off or the mortgage has been paid down substantially. When you sell it, you’ll realize a sizable amount of cash, which will be tax-free under current IRS rules, as you can keep up to $250,000 in profits tax-free (up to $500,000 if you’re married). You’ll get to add that to your $250,000 in cash and investments, your pensions and Social Security, plus income from your remaining rental property. That ought to be enough to live on, and perhaps allow you some extra luxuries in retirement. When you and your spouse die, there may be one or two homes to sell, plus leftover cash and investments to pass on. That’s a nice chunk of generational wealth.
As for life insurance, I don’t think you need it. Your kids are launched and you’ll fund your retirement with guaranteed cash coming in monthly from your pensions, remaining rental property, and Social Security. As long as you and your spouse each have enough to live on should the other die first (check income from each person’s Social Security payments, pension, as well as investment income), another life insurance policy sounds like a bigger win for your agent than either of you.
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Dear Pay Dirt,
A recent health scare in my family prompted my parents to finally tell me that I (who intend to be single and childless for the foreseeable future) will be inheriting an EXTREMELY healthy sum upon one of my parent’s demise. This parent is seen as the person with the generous purse strings in our entire large extended family, and they have helped out almost everyone in the past with something or other. I’m afraid that I’m going to become the person all these people come to for money in the future.
The thing is, these family members are generally not reciprocally generous with their attention or consideration, and I don’t know if I want to help them with their families, educations, rehab stints, gambling addictions, etc. just because my parent typically would. Worrying about this is tinging all my interactions with my extended family. Should I set relationship boundaries now to curb their expectations, or wait and see what happens? Should I tell my parents how I feel about it?
—Trust Fund Baby In-Waiting
Dear Trust Fund Baby-In-Waiting,
Inheriting life-changing wealth usually does more than change your financial circumstances. It often changes how you feel about money. It can make you scared or insufferable, happy or anxious, confident or paranoid. Or, all of the above at various points in time.
It’s certainly possible (even likely) that once you inherit this money, your family will glom onto you and see you as little more than a deeper pocket. This happens to lottery winners and professional sport players, too. But there are ways to handle this sort of windfall that make it less likely your relatives will continue to reach for your wallet.
For starters, avoid flaunting your newfound wealth. Act like those Millionaires Next Door or Warren Buffet and live in a reasonably-sized house in a nice, middle-of-the-road neighborhood. Continue to drive the same car. Sure, fly first class but don’t post pictures of yourself in front of your new jet in far-flung locations on Instagram or TikTok.
You might also meet with an estate attorney (perhaps your parent’s?), who can help you design a new trust that aligns with your values and will in tandem allow you to claim truthfully that you can’t access much of the windfall. You’ll need to work on saying, “No” to your relatives as well. Talk to your parent about the choices they’ve made when it comes to family, and why they made them. A financial therapist might be helpful in unpacking your deeper feelings about your extended family’s financial desires and failings.
At the end of the day, though, inheriting these funds might shift how you think about helping people, even your relations. You might decline to repay gambling debts or stints in rehab, but choose to offer a matching grant to family members going off to college (you’ll give them 25 percent of every $1 they put in). Or, you might create a scholarship for someone deserving and less privileged in your parent’s name.
Learning how to manage money and leverage it for good takes practice, as does working on your relationships with family, so that they feel as authentic and natural as possible in the face of your changing circumstances. Might as well start now.
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Dear Pay Dirt,
I’m about to start the process of buying a home, and I’m seeking advice on what makes the most sense financially. I have enough to put down 20 percent (and closing costs), and will have money left over in my immediate savings account. I also have money in individual stocks and index funds. Some immediate changes will need to be paid for before moving in—mainly, ripping up all of the carpets (two-story, three-bedroom row home) and refinishing the hardwood floors underneath. There will also be some fairly expensive fixes necessary in the near future—new water heater and A/C condenser. And, as I will be moving out of the city to a more suburban area, I will need to purchase a car.
Do I deplete my savings account to pay for the car and fixes to the house, to avoid a higher monthly payment? Or, should I cash out one of my index funds (thereby taking a tax hit next year for the earnings)? If I do decide to take from my index funds, should I just take enough to pay for the car and the fixes to the house, or should I just go for the whole thing and put an even higher down payment on the house? This is all so stressful when I see how much I’m spending, I’m ready to give up and just keep renting!
—(Very) Anxious Home Buyer
Dear (Very) Anxious Home Buyer,
Buying a house is stressful and scary for almost everyone. Your down payment is usually the single largest check you’ll ever write. And, maintaining your new home will be a series of ongoing expenses, not counting whatever home improvement projects you’ll decide to take on over the years.
That said, I believe buying a home changes most homeowners’ financial priorities. As you make your monthly mortgage payments, insurance premiums, and real estate taxes, it becomes more interesting to redo your kitchen and replace carpeting than spend money eating out or buying fancy clothes. You’ll also find yourself creating a larger emergency fund, especially if you know a new water heater and HVAC system expense are on the horizon.
First things first: Buy the house. Then, evaluate how much cash you’ll have left and decide how much you want to spend on a new car. I’d never advise you to deplete your cash and investments, so consider buying a used car to save money. Then, once you move in and get used to the expenses you’ll pay to maintain your property, you can start to plan your rehab projects in phases so that they line up with your ability to generate the cash to pay for them.
Some readers may argue that you should go for broke now and get the work done ahead of when you plan to move into your new home. But, I’ve always preferred to live in our homes for a while and plan out our projects carefully. Admittedly, this makes for messy living sometimes. But then again, which life isn’t?
—Ilyce
Classic Prudie
“Julia” and I have been friends and neighbors for over 30 years. We have celebrated each other highs and lows—I just don’t know how to handle this. Julia’s daughter recently got married. It was a surprise to everyone. We didn’t even know she was engaged and there was no wedding. This hasn’t stopped Julia’s daughter from spamming us all with her bridal gift registry.
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