We had kids late in life and ruined our retirement plans

Pay Dirt is Slate’s money advice column. Have a question? Send it to Lillian, Athena, and Elizabeth here. (It’s anonymous!)

Dear Pay Dirt,

We had kids late in life, and people cannot stop telling us we “will never be able to retire.” I used to laugh it off. But we grew up with little money, so I’m beginning to wonder if there is something we don’t understand about paying for college. We are 50-year-olds with a 4- and a 6-year-old. I’d like to retire at 60 or 62 at the latest.

Our ability to plan is complicated by the fact we are posted overseas for my work about 50 percent of the time. I am the sole breadwinner making about $170,000/year and will receive a government pension of about $60,000. Because my job includes housing when overseas, we are sometimes able to save $40,000/year while also maxing out my Thrift Savings Plan contributions at about $22,000/year. There is no possibility of inheritance, but we have zero debt (and no mortgage). Last year we put $35,000 in each of the kids’ 529s and now we auto-deposit $200/month into each account.

I had kind of assumed the 529s would take care of themselves and cover most of the costs of at least an undergraduate education while we are retired on about $120,000/year in the Midwest. Is it insane to retire before your kids graduate college? Will college cost a million dollars a year in 14 years? Is there a specific reason why people must work while their kids study?

—Working Until Infinity

Dear Working Until Infinity,

You’re likely reading too much into a throwaway comment that people make—your financial situation is unusual. People are projecting their own insecurities without knowing your actual numbers. Unless the person telling you that you will never be able to retire is your financial advisor, don’t put much stock in their comments.

There are even advantages to retiring while your kids are college-age. Being retired could set them up for better financial aid if you can time your retirement plan distributions to have a lower household income for FAFSA. I have even seen retired parents, not tied to a work location, move states to obtain in-state status for their kids’ preferred colleges. I wouldn’t overthink your kids’ college savings right now. What you’re already doing is more than enough, and your retirement savings should come first—there are no loans for retirement, but there are student loans. Hopefully, in the next 14 years, we’ll make significant improvements to higher education affordability, but until then, you’re making smart choices with your money. Ignore the haters.

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Dear Pay Dirt,

I screwed up my finances big time during my 20s and 30s. Despite starting out with an Ivy League education, no college debt, a good job, and a few thousand in the bank (courtesy of my parents), I ended up at age 40 divorced and broke. In addition to the bad marriage, I fell victim over the years to get-rich-quick schemes, time-share deals, cosmetic surgery scams, you name it—bad decision after bad decision. But I finally changed my ways, took a higher-paying job overseas, lived frugally, and invested regularly. At age 60, I can now look forward to a comfortable retirement. Along the way, I added a great wife and two adorable kids.

I’m advised that at this stage of my life, I should put together a will, but I just get cold feet. I know that I want to divide my estate between my wife and the kids, but I’m terrified that if I leave the kids substantial assets—even with delayed access until they are well into their 20s—they may make the same mistakes I made and end up with the same deep regrets. Even if they manage things better than I did, I don’t want a seven-figure inheritance to destroy their ambition and work ethic. I want them to have some comfort, security, and enrichment in an uncertain world, but I don’t want their lives warped or derailed. Having them wait until age 40 to receive their inheritance seems too extreme. Unfortunately, I just don’t know how to put the pieces together in a way to give them the best shot at long-term happiness. Any suggestions?

—Father May Not Know Best

Dear Father May Not Know Best,

The best way to avoid your kids being foolish with money is to teach them about money. Open and honest communication about money, the mistakes you’ve made, and the values you want to instill in them will significantly influence their future money behavior. They’re more likely to make costly mistakes with their money if it is a mysterious and enigmatic force that is never discussed. Many scams rely on shame and the cultural stigma about finances to keep finding new victims. So be open with them about your mistakes and use your bad experiences as a cautionary tale.

It also helps to expand their social circles, so they understand their privilege. If they only attend private schools and all their peers expect to inherit, they might suffer from Rory Gilmore’s listlessness. Make sure they know the challenges their peers without generational wealth experience by volunteering and socializing with people from other socioeconomic circumstances. If a young adult has a good sense of self and solid financial literacy, the inheritance will act as a safety net rather than a motivation sponge.

But even if financial education can’t prevent them from making mistakes, you have other tools at your disposal. Rather than being scared of creating a will, see it as an opportunity. If you don’t create one, dying intestate means none of your wishes will be communicated. By contrast, a well-designed trust by a savvy estate attorney allows you to restrict your children’s inheritances based on various circumstances. (Such restrictions are the plot of Renée Zellweger’s 1999 critically panned film The Bachelor.) Many trusts limit access until the age of 35, often with exceptions for educational costs. Age or time limits can be an excellent way to prevent grief-stricken 21-year-olds from going on a cocaine and cryptocurrency spree as soon as they inherit. You can also consider staging the disbursements into chunks at certain ages (25, 35, 45) or life events (graduating college, marriage). An even more creative trust stipulation might be to match the trust dispersions to their earned income annually, incentivizing them to work rather than rely on the inheritance alone. You could always leave your estate to charity or utilize a generation-skipping trust if your kids aren’t making wise decisions. I wish you a long life where your kids are settled, well-adjusted, and fiscally responsible far before they stand to inherit.

Dear Pay Dirt,

I’ve seen many questions here about gifts and the annual cap without filing the form, etc. As a general question (I’m not trying to skirt the rules, I’m really just curious how it works!) how does the government ever know? I imagine if I wrote my sister a million-dollar check (ha) that’d go through more scrutiny, but how do they ever know if I’m writing five $5,000 checks to my kid over the course of a calendar year?

—Wish I was Writing $1,000,000 Checks

Dear Writing $1,000,000 Checks,

I break into a sweat every time someone writes me asking how they could hypothetically evade taxes, wondering if it is an IRS agent in disguise.

But I’ll entertain it. The IRS is not all-knowing, and hunting down generous gift-givers is not their primary tax enforcement goal. However, they are looking for under-the-table workers. If someone gets five $5,000 checks from the same person, the IRS tries to ensure this person is not receiving money for work (earned income) without paying income tax. Because of this, third-party payment processors like Paypal and Venmo report aggregate transactions to one person over a certain amount (currently $20,000 per year, soon to drop to $600) on Form 1099-K. While checks and Zelle will not result in a 1099-K, banks have IRS reporting requirements (Form 8300) for deposits from one party that total more than $10,000 in 12 months. A mismatch between these forms and your tax return can trigger an audit.

There are other ways that gifts cross the IRS’ radar. If you give money to a family member as part of a home purchase, the lender often requires a letter stating that the cash you contribute is a gift (and not in exchange for a stake in the property). Gifts of homes, cars, or securities require paperwork for transfer of ownership that will usually alert the IRS. The IRS might also find an undisclosed gift (over the gift amount) in the process of an audit. The penalties can be steep, so it’s worth filing the simple form—especially if you don’t have a $12.92 million estate. Should you be losing sleep over the gift tax if you aren’t uber-wealthy? Probably not. Middle-class people are more likely to underpay nanny taxes or accidentally have an early 401(k) withdrawal.

Dear Pay Dirt,

I am 25 and make about $70,000, and have about a year’s worth of savings in my bank account. I know that this is a good financial position to be in for someone my age but my problem is that I am paralyzed with indecision about what to do with my savings. I know I am supposed to invest in them but I don’t understand the stock market or my investment options and when I have googled beginner guides I either find them confusing or incredibly unhelpful. I put 10 percent of my salary into a 401(k) and I max out my Roth IRA every year, but I don’t know what else to do with my savings. Add to that, growing up my parents did not have cash on hand when times were tough which was stressful, I am scared of being in a situation where I need cash and don’t have it.

—Scared to Invest

Dear Scared to Invest,

First of all, kudos to you for already putting 10 percent of your salary into a 401(k) and maxing out your Roth IRA every year. That’s a great start to building a solid financial foundation, and you’ve already worked hard to break out of your parents’ stressful paycheck-to-paycheck cycle.

Having cash for unexpected expenses is always a good idea, especially if you have a lot of money anxiety. Move eight to 12 months’ worth of savings into a high-yield savings account, and don’t worry about not investing it—it’s not an investment; it’s there for insurance. Give the account a nickname with your bank like “Sh*t Hit The Fan Fund” or “No More Stress Savings.” That money is there so you can invest without worrying about paying your bills if something goes awry. Once cash savings is settled, then tackle investment in your 401(k).

It’s common to be scared about investing when you start, but the key is to start small and educate yourself as you go. I really like A Simple Path to Wealth by J.L. Collins for its easy explanation of index investing. If you’re not already investing your 401(k) and IRA, now is the time to move your retirement funds from “cash” into a target date fund. These are great beginner funds for investing for retirement without having to figure everything out yourself. Target date funds create a diversified portfolio based on age and automatically adjust as you get closer to retirement. You only need to invest in one fund rather than buy a bunch of different ones. If you’re 25 years old, you’ll look for a target fund with the year 2060 or 2065 in the name.

Your 401(k) and IRA may have limited target date funds to choose from, but look up the ticker symbols (for example, VFIFX) on Google Finance and compare expense ratios for each. The expense ratio is how much you pay to manage the fund. Ideally, you want an expense ratio of less than .5 percent—many funds now offer less than .08 percent. You can also read about how the fund invests and allocates its money on the fund prospectus, giving you a better idea of its investment style.

After you’ve invested in a target fund for a while and feel confident in how it works, consider upping the amount you’re allocating to your 401(k) by 1 percent until you hit the annual maximum ($22,500 in 2023). Because you’re young and have a significant emergency fund, investing in tax-advantaged space like a 401(k) should come before you start playing with taxable investments. It’s also important to remember that investing is a long-term game, and taking a measured approach is OK. You should always keep a cash cushion and not invest everything you have. You are in a great financial position to take advantage of the power of compounding over time—don’t stress; just take it step-by-step.

—Lillian

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