MY MOTHER-IN-LAW Doris passed away last year at age 90. In the last few years of her life, she often mentioned that she felt guilty spending any of her money, let alone splurging. She wanted to leave the money to her children, even when her children kept telling her to spend, splurge and enjoy the last few years of her life.
Doris didn’t want to worry about her investments. Like a lot of people, she entrusted her money to a nationally known financial company. Unfortunately, the company, like many name-brand money managers, charged an asset under management (AUM) fee above 1%, which I considered high for investing her money in relatively simple index funds. Although she had a good portion invested in stocks, the return she received after the AUM fee was much lower than the return she could have enjoyed with index funds held at a low-fee company like Charles Schwab or Vanguard Group. Doris, however, didn’t want to think about it too much and just assumed that the big name meant best management.
Result: Even though Doris thought she was saving money and doing the best for her children, she was unnecessarily wasting part of their inheritance by overpaying for money management.
After going through my mother-in-law’s passing, and the accounting and disposition of her estate, I started to think about how my husband and I could best handle our estate. I wanted to avoid or minimize Doris’s two issues: being afraid to spend our retirement money and wasting the estate by having it held by a company with high fees. When I came across M1 Finance, with its no-fee, fractional, automated investing, it struck me that I had found my solution.
We have two sons, ages 22 and 23, both recent college graduates, who have just started their first jobs. Both seem to be on track for good careers—one’s a software developer and the other’s an actuary—so they have no immediate need of financial assistance. My husband and I are 57 and 53, and we were fortunate to be able to retire early. We know we have many years ahead of us. But at the same time, we want to leave something behind for our sons.
The upshot: I front-loaded our sons’ inheritance by setting up Roth IRAs for both of them. We contributed the maximum to their accounts this year and plan to continue contributing for the next few years. We asked them not to touch the money until they reach retirement age.
Generally, I believe in owning a broadly diversified portfolio. My husband and I are invested in all the major stock market sectors, both in the U.S. and internationally, and we also own bonds. Our sons, however, are much younger, with a far longer time horizon. I decided to invest 100% in stocks, divided between exchange-traded index funds focused on U.S. and international small-cap value stocks. This has the potential to give their portfolios’ growth an added boost. Academic research suggests both small-cap stocks and value stocks tend to generate superior returns.
We stressed to them that they should continue to contribute the maximum to their employer’s 401(k) and that the Roth IRAs we set up should only be a small part of their total savings.
Front-loading their inheritance with M1 has five advantages:
This plan requires lots of faith and patience over several decades. While no one can control the return on the investments or how the market will perform over the decades ahead, we hope to take advantage of long-term growth and, at the very least, avoid wasting money by paying unnecessary management fees for minimal actual management.
We also hope that, by walking our sons through this process, they’ll gain the wisdom that a little oversight and using the right financial firms can make a big difference in the long run. And we won’t charge them a fee for that lesson.
Jiab Wasserman recently retired at age 53 from her job as a financial analyst at a large bank. She and her husband, a retired high school teacher, currently live in Granada, Spain, and blog about financial and other aspects of retirement—as well as about relocating to another country—at YourThirdLife.com. Her previous article was Won in Translation.
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