The Lange Money Hour: Where Smart Money Talks
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Renowned Expert on Children's Finances - Five Answers to the Most Important Investment Questions
Jim Lange, CPA
Special Guest: Neale Godfrey
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- Introduction of Guest – Neale Godfrey
- Be Honest With Your Children About Finances
- Is Private School Worth The Debt?
- Caller Q&A: Should I Roll 403(b) to an IRA?
- Leave A Video for Your Kids or Grandkids
- Caller Q&A: Benefits of Inherited IRA for Grandchildren
- Children Should Earn Their Allowance
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Hana: Hello, and welcome to The Lange Money Hour, Where Smart Money Talks. I’m your host, Hana Haatainen Caye, and of course, I’m here with Jim Lange, CPA and best-selling author of the first and second edition of “Retire Secure!” and now, his new book, “The Roth Revolution: Pay Taxes Once and Never Again.” One small change for the new year is that the show will start at 7:05 pm instead of 7:00 pm to allow for KQV to provide the news at the top of every hour. Jim’s guest tonight is Neale Godfrey, renowned expert on children’s finances, so this will be a special show for parents and grandparents. Neale is the founder of the Children’s Financial Network and is the author of many books on finances for women, parents, grandparents and children, including the New York Times number one bestseller “Money Doesn’t Grow on Trees: A Parents Guide to Raising Financially Responsible Children.” You may have seen Neale on Oprah, Good Morning America, the Today Show, NBC and CNN. She will be joining Jim to share her insights on helping your children and grandchildren grow into financially responsible adults. Only one quarter of parents say they feel well prepared to teach their kids about basic personal finances. As a result, roughly 180,000 young adults between the ages of 18 and 24 declare bankruptcy each year. We will talk about how to be sure that you and your children or grandchildren don’t become a statistic when you start teaching your kids to be financially responsible, and how to combat the “I want! I want!” syndrome. Tonight’s show will also include special tips for grandparents. Children grow up sooner than you think and will need to buy cars, get mortgages, manage credit cards, pay off student loans and save for retirement. This show will help you make sure your kids are financially fluent. But before I turn it over to Jim, I want to remind our listeners that the show is live, so please feel free to call in with your questions for Neale. The number is (412) 333-9385. Good evening, Jim, and welcome to the program, Neale.
Jim Lange: Thank you.
Neale Godfrey: It’s wonderful to be here.
Jim Lange: And welcome back. I should tell our audience that we’ve been on for a while now, and this year, one of the things that I have decided to do, in addition to having some new guests, is to bring back the real champions. The people who just hit it out of the park with their last radio appearance, and that’s why Neale is literally leading the charge for the 2012 year. Neale, you did a great job last time and I’m hoping that we could have an equally good show, so it’s wonderful to have you with us.
Neale Godfrey: Well, thank you. It’s wonderful to be back.
Jim Lange: Well, some of the things we might touch on will be a little bit of a repeat, but maybe with a different tint, but why don’t we start with even just some of the basics. What does it mean to raise financially responsible children, and particularly with the economy the way it is today, and I don’t know if the tough economy has changed your thinking on your approach to raising financially responsible children?
Neale Godfrey: Well, basically, the economy has highlighted that this is even more important, and it really highlights everything that you teach, Jim, in terms of really empowering people to take charge of their financial life, and frankly, a lot of us grew up in, I would call, you know, kind of a Donna Reed household, those households where the biggest secret was any money issues, and maybe even what dad earned, or what the household bills were, or all those mysteries like paying taxes and taking charge of your own finances, and there is no way to expect these kids to be empowered to take charge of their financial life if we don’t start talking about it and give these kids the tools that they’re going to need. So that’s really what I do, and I think what you highlighted about the economy is this is a great time for us to take a deep breath and get back to basics: who are we? What’s our relationship with money? What do we really want to convey? Are you really cooler because you drive a cooler car? Really?? Is that what you want to tell the kids? So, that’s really what I want the whole recession that we’re in now or the challenges that we’re facing to be a time for us to reassess where we are and who we are in relationship with money. And also, if, for some reason, the recession isn’t hitting you, which I think would probably be unusual, but I want our kids to be sensitive to the families who are touched by this, and we need to give them those tips and tools and conversations around money.
Jim Lange: Neale, one of the problems with having you as a guest is that every time you say something, I want to ask ten more questions instead of the ones I’ve already prepared.
Neale Godfrey: Well, I’m sorry for droning on! So, Jim, the deal is, you know, you just have to say, alright, stop it, Neale!
Jim Lange: No, no! The problem is that it’s such good stuff! But I wanted to touch on something that I wrestle with personally, and I have a 16 year-old daughter, and you know, we do okay, and sometimes it’s natural for me to talk about my business and I’ll talk about a particular sale of…even, let’s just say, oh, you know, somebody agreed to do an estate plan with us and it’s $3,000 or $5,000 or something like that…by the way, for most listeners, don’t get scared. We still do quite a few in the $1,000 to $3,000 range.
Neale Godfrey: Sure, of course.
Jim Lange: But anyway, my daughter’s sitting there and she’s hearing this, and she’s working for minimum wage doing some babysitting and actually doing some work at the school, and she’s thinking, “Boy, he can make in one engagement what it’ll take a year for me to make,” and I sometimes think well, is that appropriate for me to speak like that? Should I not say that? And what should parents say? I mean, I don’t think that…are you advocating that says well, dad makes $62,500, but that’s before his 401(k) contribution. How open should we be with our children?
Neale Godfrey: Well, what I do is welcome to planet Earth. I sit down with them and I show them what I call the good, the bad and the ugly, which is I have, you know, X amount of education. I have X amount of experience. My first job in 1972 paid $6,500 a year. That always causes the air to be sucked out of a room when you hear that number, and I had to pay obviously taxes and all my living expenses. So, even though it may sound like a lot in terms of what you get paid, I think it’s really important to sit down with the kids and say, “Here it is. This is what I get paid, this is what goes out for taxes, and this is my budget.” Now, a couple of caveats: number one, you have to say to them, “I expect this not to be discussed with anyone,” not because it’s such a heinous thing. It’s because I don’t want anyone to feel badly or I don’t want anyone to judge me by what I earn because that’s not who I am. It’s what I do with the money, it’s my value system and what we believe in as a family, not the money. It’s never about the money, and different jobs pay different things. A fact of life. That’s it. And that’s number one. Number two is they don’t get the full picture. They think, “Wow, $3,000 for an estate plan? Oh my God! You know, you could do 7,000 of those and look what you’d earn, Dad!” Well, that’s not, you know, that’s like hold it! That’s not the fact of life. It doesn’t work like that. By the way, let me tell you how many hours of work went into that. Let me tell you how many hours of preparation and follow-up, and do an estimate of how much knowledge of hours you needed in there. So, you know what, Jim? I bet you are being paid less than minimum wage for that, by the way.
Jim Lange: Well, I’m not sure it’s that bad, but it’s a lot less than people expect.
Neale Godfrey: Well, but you know what I’m saying. It just didn’t happen. You didn’t roll out of bed and decide that you were going to be an expert in this field.
Jim Lange: Yeah.
Neale Godfrey: And I want you to put it in perspective, but I also want you to sit down with the bills. Part of welcome to planet Earth is what I call the bill paying game. Lay the bills out on the table. Now, if you can’t afford stuff, and I don’t mean you personally, but one of your listeners, don’t scare the kids to death, to let them think that you’re so far underwater with everything. But if it’s a realistic budget and you guys are doing okay, lay it out on the table. What I do for younger kids is I literally count it out. I pay my paycheck in cash and I count it out, and everyone goes, “Wow! That’s a lot.” And I count out what goes to the government, then I count out what goes for rent or mortgage and utilities and phone and cable and on and on and on. Here’s what goes into savings. Here’s what goes into my retirement. Here’s what goes into my emergency fund. Here’s what goes for the vacation, whatever it is. And by the way, here’s what’s left over. That’s the budget.
Jim Lange: And do you tell them that there’s money for their college?
Neale Godfrey: I do, absolutely, and I also tell them the expectations. I can afford a state school. I cannot afford a private college. Private college costs, and lay it out, $50,000 a year. Do not set expectations. What I think is the worst thing in the world is to have kids get into one of the private schools in our country, an then, as a parent, you turn around and go, “You know what? I can’t afford it.” That’s not fair. And by the way, our public institutions are not better or worse than our private institutions. It really depends upon, as far as I’m concerned, what you put into your education in terms of studying and being involved in what’s going on, not that you just happened to go to a private school.
Jim Lange: You know, I have a lot of clients whose parents paid for their education, and even private education back when private education was still semi-affordable, and I think that it’s a terrible thing when parents…and I see this all the time. This isn’t exactly on point, but maybe it is to an extent. You know, I’m 55 years old and I’m seeing it with my friends who sometimes have children who are college-aged, or maybe they’ve been past it, and some of them are doing very well financially and some of them are doing okay, but not great, and for those people, I have seen kids get full scholarships to the state schools, nothing to the private schools, and Dad shells out $200,000 or even more over the child’s education, which means that in one particular case, he’s going to have to work for maybe another three or four years or longer for the child to go to that school instead of the state school where the child got a free ride, and that, to me, is really not a very sound way to manage family finances.
Neale Godfrey: Well, you know, I don’t disagree with you, and my whole thing is, again, expectations and choices, and as long as that person knows, hey, that’s going to mean, like you said, three years longer that you can’t retire or there’s an opportunity cost and you can’t do this or you have to re-mortgage your home or you have to do whatever, as long as they understand the consequences of their decision and they’re willing to do that. Not mine! I’m with you. Not my decision. And the other thing is too, I think it’s really tough to burden the kids with the amount of debt. If you have a $200,000 debt when you pop out of college, to sit down with the child and say, “You know how long it’s going to take you to pay that back?” Someone had done a calculation that said if you finance your education all the way through private school being a doctor, you’re going to be something like 45 to 50 years old before paying that debt back before you earn the first dollar, you know, having a meager life. Obviously, you’re living someplace and eating food, but that’s like whoa! Can you imagine that?
Jim Lange: Well, it’s pretty scary, and a lot of parents I think are really wrestling with that issue, particularly parents who came from a system where their parents paid for their school. I know, when I grew up, the deal was, and it was…I don’t even remember it being stated clearly, but I knew that the deal was my parents would pay for a state school and anything else was on me, and I got into Syracuse and I was really excited. My Dad said, “Well, that’s fine. I’m going to pay for what Pitt or Penn State would pay for, and you can pay for the rest.” And I thought, “Oh my goodness,” and I did some numbers and I went to Penn State. So I think that that’s very good advice in terms of setting expectations, as opposed to, let’s say, a child who might be hanging out with a crew that got into a private school gets into a private school, and then Mom and Dad say, “Hey, we just can’t afford it.” And that discussion comes after the child has applied and gotten in, but unfortunately without financial aid.
Neale Godfrey: What a horrible thing, and I’m really impressed that your parents did that. My parents, we always knew that we had to pay for school. I did go to a private school. I worked 40 hours a week and went to school during that time, and you know, I mean, it wasn’t tough doing it because you know, as a kid, you do what you have to do, but I have to say, looking back on it, I would’ve preferred to have done college and been more engaged, because when you’re working 40 hours a week and going to school, and I graduated in three years because it was a whole year less of paying for it. So, yeah, I would’ve liked a different experience. I would’ve loved to have gone to a state school. I didn’t look at it that way. So I didn’t have the benefit of your parents, you know, to be able to do that. So, I just think that, as parents, we have to start articulating that.
Jim Lange: Now, what do you say to the parents who can afford a private school for their kids? Is that perfectly fine to set that expectation?
Neale Godfrey: My view is I think kids should be paying part of their school under all circumstances. My deal with my kids, and they both went to private schools, was that you guys have to pay for one year. And that was $50,000. Now, they could do it through loans or scholarships or working or, you know, taking AP courses and shortening the college. In both my kid’s cases, they worked and they earned the money, and they both paid for $50,000 of their college. I think that’s pretty cool.
Jim Lange: Now, that’s going to come as a revelation to a lot of our listeners. That might have been the first shocking thing that you’ve said. Let’s assume you, or even your parents, that is you, the adult, or the grandparents have sufficient money, you’re still saying it’s a good idea for kids to pay for school.
Neale Godfrey: Yep. Well, they pay for a year.
Jim Lange: Oh, pay for at least a year.
Neale Godfrey: And I’ll tell you one thing: my kids sat there and figured out if I miss class, it costs me X amount, and my son now is in graduate school, and I was laughing the other day because he still has…yeah, he’s paying for that. I’m helping a little bit because he happens to be at Columbia. I’d hate to tell you what it costs. But what’s very funny is he still has the conversation with me saying, “Oh, I missed class the other day and it cost me blah-blah-blah,” and I just was smiling because I thought, “Oh yay, it’s working! It’s still working!” Yeah, it gets them engaged in the process.
Jim Lange: By the way, this is the first time I’ve ever heard somebody who I really respect say that. You know, I hear a lot of grandparents and parents who are very proud that they paid for every nickel of their kid’s school, and I know my own experience, undergrad was paid for by my parents, but I paid for my law school, and all of a sudden, I magically became a very good student! When it was on my dime, all of a sudden, I was serious. When I was on the dole, you know, I did alright, but I was not as diligent and I wasn’t working as hard, and actually, I was working as a CPA while I was going to school at night.
Neale Godfrey: Isn’t that miraculous, all of a sudden when it’s out of your pocket? And it’s not the idea that they have to pay for the whole thing. I certainly did not expect my children to pay $200,000 plus of education. I just didn’t. But I did expect them, and it had nothing to do with being able to afford it, it had to do with that’s your responsibility, and they were raised that way. They knew that.
Jim Lange: Well, that’s going to come as a revelation for a lot of listeners, and probably a lot of people are not going to like that. On the other hand, maybe the Tiger Moms Association of America will stand up and applaud. By the way, would you say this even if you had $5 or $10 million and it truly wasn’t a money issue for you?
Neale Godfrey: Absolutely.
Jim Lange: Alright, well…
Neale Godfrey: It was not a money issue. It was a responsibility issue. And again, it doesn’t have to be fifty, but I think it has to be something, and I say that to parents. I was giving a speech to a group and you had to have a half a billion dollars in net worth to be invited, and I said the same exact thing to them. It had nothing to do with affording.
Hana: Okay, Neale, we’re going to take a quick break. When we come back, we’ll continue this conversation, and I want to remind our listeners out there that we are live tonight, so if you have any questions, you can give us a call at (412) 333-9385. We’ll be right back with Neale Godfrey, renowned expert on children’s finances, and Jim Lange on The Lange Money Hour.
Hana: Hello there, and welcome back to The Lange Money Hour, Where Smart Money Talks. This is Hana Haatainen Caye, and I’m here with Jim Lange and Neale Godfrey, renowned expert on children’s finances. This is a special show directed at parents and grandparents to help you help your kids and grandkids to be financially responsible and prepared for the future.
Jim Lange: And thank you, Hana. Well, it looks like we have a question here.
Hana: Yeah, we have Harry from Wexford who has a question. Harry, are you there?
Harry: Yes, ma’am.
Hana: What would you like to ask Neale?
Harry: My wife left the West Penn Allegheny Health System about six or seven years ago. She works with someone else. Because of what is happening with the Highmark UPMC situation, should she move an ARISA-protected account, it’s a 403(b), to an IRA?
Jim Lange: Well, I think that’s a question more for me than Neale, and not exactly on point, but I’d be happy to handle it anyway because I happen to have some strong views on that. Nine out of ten financial advisors are going to say, “Yes. You should absolutely take all the money in the 403(b), roll it into an IRA and that significantly increases your choice of investments,” and that is true. On the other hand, before you do that, there are a couple of things that I think are really important for people with retirement plans to have, and that is to see if some of the investments that are offered in their existing retirement plan are actually better than things that they can get outside on the open market. So in the 403(b) world, one of the very common investments that I don’t think that you can do as well as on the outside is TIAA. That is the bond portion of the TIAA-CREF, CREF being the stock portion. In the private sector, you might find things like the Westinghouse or other large retirement plans have what’s called a GIC, a guaranteed income contract, and sometimes, those bond funds are actually better in paying a higher interest rate than you can get. So, I would never tell somebody with money in TIAA, for example, to take that money out of TIAA, roll it into an IRA, and particularly if they have to pay some fees or any commissions on a product, they’re probably better off keeping it where it is. Notwithstanding, in general, at least for the stock portion, I usually am a fan of rolling it into the IRA. There are a couple of things that they have to watch for, which are after-tax dollars inside a retirement plan, and in the private sector, NUA. I don’t know if that is helpful, and I’d love to continue this conversation, but we advertised a children’s show…
Harry: Yeah, I do apologize for that.
Jim Lange: ...and so, we’re going to go back to that.
Harry: Alright. Thank you very much.
Jim Lange: Okay? Alright. Thank you. And Neale, one of the things that I had just mentioned was that one of the workshops that we are doing, which is the appropriate use of trusts to protect your money (you know, we have a catchy title), a lot of times, and it’s probably, at least in my practice, more for grandparents than for parents. Let’s assume, for discussion’s sake, that you are leaving money to a grandchild, and by the way, the way I typically do it in my wills is I usually leave the money to the parent, and I leave the option for the parent to disclaim, or say “I don’t want it,” in which case, it goes into a trust for the benefit of the grandchildren. Let’s assume, for discussion’s sake, that the grandchildren are young. So we don’t know their personalities. So, for example, my 16 year old, I think, is very mature with money and would be able to handle a larger sum of money at a younger age than, say, other kids. But let’s assume that the kids are young enough that we really don’t know how they’re going to be in terms of financial responsibility, etc. And let’s assume that it’s potentially a lot of money, how would you, if you were advising a grandparent, and I’m probably more interested in the psychological part because I’ll take care of the tax part. How would you want to structure a trust for a grandchild who is too young for you to know their personality?
Neale Godfrey: When they’re too young, actually, that’s the easy part because what you’re going to do is split up everything evenly.
Jim Lange: Oh, no, I mean when…I’m sorry. I didn’t make myself clear. So, for example, some of the documents I read say that if the child is less than 21, it goes into a trust, and on their 21st birthday, they get the whole thing. In the documents that I do, rather than trying to be King Solomon and figure out the perfect age, I tend to split it up, so the trusts that we provide might say something like health maintenance & support, education, post-graduate education, down payment for a home, maybe a third at 25 or 30, a third at 30 or 35 and then we terminate the trust at 35 or 40. How would you recommend doing it?
Neale Godfrey: I love what you’re doing. Number one, what I do is obviously make sure that the parents talk about, or grandparents talk about, the expectations of what’s the money for, and I don’t think…I agree with you. There’s no magic age of maturity, and if the parents think that gee, just because they’re 21, they should be responsible, it’s not going to happen that way because a certain amount, and just like you said, you can’t control it from the grave, could pass to the kids. You could specifically say it’s for education and for other things, you know, the health and maintenance and well-being of the child with a trustee, but the fact of the matter is when the money does transfer, it could be for, you know, sex, drugs and rock and roll, and that’s not what your intent was, unless, of course, it’s specifically for college or something very, very specific. However, I think that it’s the conversation, and what I do is recommend that you actually put it on video because you may not live to see a transfer, and for the children and grandchildren, to see a video that says I love you, this is who I am and this is what this money is for is a very powerful tool. It’s not just in writing. It’s really conveying from the heart who I am, and it may be I want you to donate some money to charity, I want you to be involved in certain things, I want you to have this money for your health and well-being. This is what I want for you. Then, I think that a certain amount when they go into school, a certain amount when they come out of school, you want the money to be, I think anyway, a benefit for their life, not something that’s putative and puts a shackle around their legs. That’s not, to me anyway, the purpose of what you’re trying to do. There was one family I dealt with, by the way, that controlled the children with a 93 point will and a trust from the grave to the extent of who they would marry, what their religion would be, how many times a week they would go to church, seriously, I mean, it was, unfortunately, bordering, to me anyway, on psychotic.
Jim Lange: Well, that sounds like a nightmare, but I’ll tell you what’s so interesting is that we have a variety of experts on The Lange Money Hour, and one of them happened to be an estate attorney, and the estate attorney recommended the same thing that you did, which was actually a video of the parents, or grandparents, explaining some of the purposes, not just in the exact legal language, but in terms of, you know, from the heart what this money’s for, and what he actually said is say a little bit more about what had to be done to earn the money. So, it’s not like I was just sitting on my butt and all of a sudden, I came into $1.5 million. No, I worked 60 hours a week for 45 years and have accumulated this money, and because I have that old depression-era mentality, I never was smart enough to spend it, and now I’m leaving it to you. And he said do a video, and it’s really interesting you’re really saying the same thing.
Neale Godfrey: Yeah, and it’s such a wonderful thing for the kids to have. Now, P.S. on the video side, I recommend all sorts of other videos too, not just, you know, kind of gilding about the money part of it, but who we are and what life has meant and what you mean to me and when I saw you for the first time when Mom handed me to you, what that meant to me, and how I love and adore you and this is what this is about to me. It’s not about the money. I never want you to look at it in terms of the money. It’s about what I’m able to do for you and what I want that to mean to you. And, you know, it doesn’t have to be “It’s just for education.” It could be “I want you to take the most awesome trip in the world! But while you’re there, I want you to give X amount to charity.” I cannot tell you what this has meant to kids. Could you imagine if your, I don’t know if your grandparents are alive or not, but if they had done something like that? How cool would that be? Right?
Jim Lange: I think that would be pretty cool, and interestingly that you said that because my Mom is actually 95 years old, and she’s still with it, and we are videotaping her with some different stories, and you can actually buy canned questions, if you will, to get her to open up, and the little twist that I wanted to add to that, by the way, is instead of me being the interviewer, I wanted my daughter to be the interviewer.
Neale Godfrey: Love it!
Jim Lange: And the thing that I’ve been toying with, just for your own and our listener’s information, I haven’t done anything yet. Maybe that would be a good New Year’s resolution in addition to the type of practice that we have, is to somehow coordinate or offer that as an additional service.
Neale Godfrey: I love that as a service, because you know what’s really cool? They can come into your office, you can set the camcorder up and you can do it right there. I love that because that’s one of the things that the family’s like, “How do we do it?” and “Who’s gonna do it?” You know, do it! What a wonderful service to do, and what you could do is have the money questions. You can have the non-money questions, and you know, literally, you guys can walk out of the office. It doesn’t have to be that you’re sitting there listening.
Jim Lange: Sure.
Neale Godfrey: I love that as a service!
Jim Lange: Yeah. There’s an attorney who does that, and I actually brought it up to some of the other attorneys and the people in my office and they said, “Oh, no, that’s a lot of aggravation,” and then, “How are you going to bill for it?” and blah-blah-blah, and now I have a renewed enthusiasm for doing that because frankly, it’s going to be a little bit awkward for us for my Mom. You know, we’re juggling well, who’s the video person going to be, what’s the lighting going to be, but in effect, if I set that up one time, then it would be relatively easy for clients. And then the other thing I was just thinking is that might be a good way for me to do frequent video communications.
Neale Godfrey: Yeah. Well, you know what? The truth is we’re in the YouTube world. That is the best way to communicate right now, and everyone’s comfortable with it.
Jim Lange: Yeah. In fact, I probably have about 90 clips on YouTube.
Neale Godfrey: Yeah, I do. I have Oprah appearances. You know, I have a whole bunch of stuff, yep! I had my son on Oprah when he was 7 years old. You want to talk about Mom, take it down. Yeah!
Jim Lange: No, well, I think that’s terrific because…and the other thing that I do is I videotape a lot of the workshops, and then I’ll cut out parts that I thought were particularly interesting, and then I’ll put them on YouTube, and then I actually e-mail them out.
Neale Godfrey: Exactly.
Jim Lange: And by the way, I will take the liberty of mentioning that if anybody is interested in that, if they go to www.retiresecure.com and they sign up for the e-mail, they will get not only a summary of “Retire Secure!” which was the best-selling book, but then they’ll get on the e-mail list that will have these. By the way, you know something? I just realized I have done a great disservice. We have not talked about your book “Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children,” which by the way, I not only liked it myself, but I had a client rave about it. He said, “Well, I read a couple of these money books about kids, and Neale’s was by far the best one.” So, I should ask you, Neale, “Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children,” which I really liked, what is the best way for our listeners to get a hold of that if they are interested, which by the way, I’m gonna say if you are a parent or a grandparent and you are interested in raising financially responsible children, obviously listening to us and particularly since we’ve scattered a little bit in our focus, would be a terrific thing. Neale, what’s the best way that our listeners could get a hold of that, “Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children.”
Neale Godfrey: They can go on Amazon and order that, or they can be in touch with me. They can Google me and get in touch with me. Actually, I’ve written, it’s kind of pathetic, about 23 books.
Jim Lange: Well, I don’t think it’s pathetic. I admire it. I typically just mention one because otherwise, it’s sometimes overwhelming, and let me ask you this: if you had young children and you were interested in one source and you didn’t want to read 23 books, is that the one that you would read?
Neale Godfrey: Yeah. If you want to raise financially responsible children, that’s the book that I would read. If you want to get the kids involved, I’ve got books for kids and I’ve got other things, but that’s exactly the book, you’re right, that I would recommend.
Hana: Okay, Neale, we’re gonna take another quick break, but before we do, could you give the listeners your website address?
Neale Godfrey: Sure. It’s www.childrensfinancialnetwork.com, or they can Google me, Neale Godfrey, and they’ll be sent into the website.
Hana: Okay, that’s great. When we come back, we’re going to continue this conversation, and again, I want to remind our listeners that we are live, so if you have any questions for Neale, give us a call at (412) 333-9385. We’ll be right back with Neale Godfrey and Jim Lange on The Lange Money Hour.
Hana: Hello there, and welcome back to The Lange Money Hour, Where Smart Money Talks. This is Hana Haatainen Caye, and I’m here with Jim Lange and Neale Godfrey, renowned expert on children’s finances. This is a special show directed at parents and grandparents to help your kids and grandkids to be financially responsible and prepared for the future.
Jim Lange: I believe we have a question.
Hana: Okay, yes. We have Bob from Pittsburgh with a question on IRAs?
Bob: Yes. My wife is recently deceased, and I just signed off on the documents to pass on her IRAs to six grandchildren, and I wasn’t popular with my children because I said I don’t want it used for their college. I think it’s parent’s responsibility for their college money. I want it to be used as a long-term IRA and pass on an IRA to the children, stretched out is what I think they call it, a stretched out IRA, and of course, if anything serious would happen, I think there’s two trustees on with each parent as trustees for their children, and I think we could change it if something became an emergency that they needed money. But I really thought that the intention of passing on money was solely for the children in long-term security, like their own IRA. I just wanted your opinion of whether you think that’s a good, bad or indifferent idea.
Jim Lange: Well, what I would say is first of all, it is the choice…when you’re writing a will, it’s really up to you to decide what to do and where your money goes and how it goes. So, for example, I’m going to say the vast majority of the wills that I write for minors, or children who are college-aged or younger typically do include education, but in the area of the IRA, and specifically what you’re talking about is a stretch IRA, so let’s just say, for discussion’s sake for easy math, that the IRA is $100,000. The child is required to take a minimum required distribution, just like you are when you turn 70, of the inherited IRA, or in the case of a Roth IRA, it’s the same factor. And let’s say that the child is 15 years old, and according to the tables, has roughly, let’s say, a 70-year life expectancy. They can take one over seventy, or let’s say, between one and two percent that they have to take out, and then leave the rest in there. Now, what you’re doing, which, to me, is very interesting because you are combining your values, your values being that the parents pay for college. You’re combining your values with what makes a lot of sense financially, which is keep the distributions very, very small in the early years and let that money continue to grow tax-deferred, or in the case of a Roth IRA, income tax-free, and have that money available for the child when they become an adult, and actually, you’re helping the child or grandchild with their retirement. So, my hat’s off to you. You’re an original thinker and maybe your kids aren’t thrilled with that idea, but I’ll tell you what. Even just a relatively small amount of money in an inherited IRA or an inherited Roth IRA for a grandchild can make a huge difference in their life.
Bob: That makes me feel comfortable. Your numbers were right on. Each child will have about that, so they will have distributions through their life. Some are only three and four years old and some are fifteen and seventeen years old, but at forty, they’re free to have it.
Jim Lange: Right. Now, the only thing that you have to be really careful about is the trust that was drafted, and we draft these trusts as attorneys all the time, the trust that is drafted must meet five specific conditions, and if you botched any one of them, and it’s very easy to botch it, then the IRS has the right to accelerate the income and you don’t get that stretch, and for some reason that I don’t understand, the vast majority of, whether it’s the financial advisor, the attorney, the client, most, and I’ve even heard statistics as high as 90% or more, most of the people botched the stretch IRA. So hopefully, you went to a good attorney who got the right language in, and then you’re going to follow it up, and then…by the way, I do like the fact that there is something in the trust for an emergency because you don’t want the kid to, you know, be out on the street so he can live in a palace when he’s fifty.
Bob: Well, the emergency is the trustee, me, the grandfather with the child, my child.
Jim Lange: Um-hmm.
Bob: And if we decide something is wrong with this trust, we can change it.
Jim Lange: Yeah, and I like that, and by the way, I also like the fact that you’re keeping the trustee in the family. Mellon Bank or PNC might not be too happy, but I prefer that. I’d love to chat further, but again, I have this wonderful national expert on the line, and I do have a couple more questions for her about children’s finances. Although, I guess this is, indirectly, children’s finances. Neale, I don’t know if you had any opinion on what I was saying.
Neale Godfrey: No, I agree with you 100%, and I would love for you to be able to take a look at it to make sure that it’s right, because I agree, and that’s one of the big scary parts is that it could be messed up.
Jim Lange: Well, it can and, frankly, usually is. So that’s one of my big things. See, I don’t have the $5 and $10 million clients, and I don’t address people like you do that you have to have a half a billion dollars to walk into the room.
Neale Godfrey: No, I didn’t mean that. Yeah, that was unusual. No, I deal with normal people, but I’m just saying that. I think it’s important to know that all people have the same problems, and that, frankly, in terms of this situation, what a wonderful way to do the gift, what a wonderful legacy. So, you know, I’m with you.
Jim Lange: Yeah, and it’s interesting. Pittsburgh’s a working town, and most of my clients have been working for twenty, thirty or forty years.
Neale Godfrey: Sure.
Jim Lange: They didn’t grow up with a silver spoon, and they became…I have a lot of college professors and a lot of engineers and a lot of, let’s say, middle managers, and what has happened is so they start out in life not having a lot of money, and the salaries that they make, you know, are not necessarily phenomenal, but it was reasonable. So, it was enough to pay the mortgage, pay for the kid’s teeth, pay for at least…maybe with your idea, a little different, but basically pay for the kid’s college education. So money’s always been tight, and then, the money that they have when they’re in their sixties or older are very significant retirement plans. So, the planning for that has to be really good, and I hope that that gentleman’s attorney really understood how to draft for IRAs and retirement plans, which at least, in my case, that is the majority of probably more than half my client’s money, the money in their retirement plans, not in their savings or money outside their retirement plans.
Neale Godfrey: Well, it’s what we’ve worked for our whole lives, and we want to make sure that it goes to where you want it, and I don’t want people to be penny wise and pound foolish. A lot of people think, “Oh, I can do this on my own,” or “Oh, I can save money.” This is not where to penny pinch on this. It’s the same thing when people go, “Oh, I can go online and write my own will.” Uh, no. What I would advise is go in to an attorney with the things that you think you want as your list. That’s going to save you money. So it’s an hour meeting and not a ten-hour meeting. Don’t try this at home.
Jim Lange: The clock is running down. There’s something that you said during the last time you were here as a guest that had a personal impact on me and my family, and you talked a little bit about not necessarily having a situation that we had before, which was kind of on a case by case basis decided what expense we would be happy paying for and which ones we weren’t, but you more or less had a different idea in terms of, let’s say, an allowance. So, what I’m going to do in case we get cut off, I’m going to give one more plug for your book, and then I’m going to ask you to answer that question. So, the book is “Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children,” and you can get that on Amazon.com. Again, “Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children,” by Neale Godfrey. Alright, so if you could tell our listeners a little bit about, and you have two minutes, is to tell our listeners a little bit, and actually maybe about a minute because we have a little outro…that’s tough, but a little bit about children and allowance?
Neale Godfrey: My basic tenet is that I think that they should earn their allowance because we’re kind of incubating them at home. However, there are some chores they do as a citizen of the household and don’t get paid, and then you have to teach them to budget. A budget is a habit, just the same way you budget now. So part goes to charity, part is instant gratification, part is pushed off to save for something larger and part is long-term. For kids, long-term is college, their future. And that’s, in a nutshell, what I believe.
Hana: Wow, I appreciate that. I know when I raised children, we had our little separate banks and part was savings, part was giving and part was what they could spend. We didn’t have the long-term, though, so that’s really excellent advice. I want to thank you for joining us, Neale, and for sharing this invaluable wisdom with us, and I want to thank our listeners for joining us for another The Lange Money Hour, Where Smart Money Talks. Neale joins our growing list of informative guests through the years, including Jane Bryant Quinn, Ed Slott, Roger Ibbetson and others, and you can access our vast library of past shows on our website at www.retiresecure.com, and as always, you can catch a rebroadcast of this show at 9:05 am on Sunday morning right here on KQV. Join us at 7:05 pm on January 18th when our special guest will be Larry Swedroe, principal and director of research for Buckingham Asset Management. We hope you found tonight’s discussion enjoyable and informative.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.
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