How to Help the Post Boomer Generations

Inflation, the rising cost of education, reduced investment returns, soaring real estate prices, and terrorism all concern America’s wealthy. But nothing concerns them more than how those and other factors create great obstacles for their children and grandchildren.

A recent survey of America’s wealthy done for U.S. Trust revealed that, like most other Americans, the affluent worry about the security of following generations. In the 2005 Survey of Affluent Americans, the wealthy said for the first time since 2001 that terrorism was not their top worry. For 81%, the next generation’s fate is their prime concern, with terrorism coming in second.

It is easy to see why the wealthy and others are concerned about succeeding generations.

Higher education is more important than ever to one’s financial security. But the cost continues to rise faster than inflation. Four years of college at many institutions now costs more than the average house.

Housing prices surged along both coasts over the past five years. In many places homes are out of the reach of most young people.

After the bull market of the 1980s and 1990s, we have had five years of poor investment returns. We likely will continue to have below average returns from most U.S investments. That makes it difficult for young people to build a nest egg and save enough for the down payment on a first house.

The rapid disappearance of corporate retirement plans and medical benefits also is a concern. The younger generations will be largely on their own to pay retirement expenses. IBM recently announced that it would freeze its pension plan and not allow the accrual of new benefits. Employees will have to contribute to 401(k) accounts in the future. This is just the latest in a 20-plus year trend.

Fortunately, there is a lot that both the affluent and the rest of us can do to help following generations be prepared financially.

• Roth IRAs. I have long identified the Roth IRA as the best way to help a grandchild become financially secure. The grandchild first has to earn some income. It can be from babysitting, lawn mowing, or a part-time job. The grandchild does not have to contribute those actual dollars to the  Roth IRA. But the grandparent can match the grandchild’s income with a gift, and help the grandchild set up a Roth IRA with the money. 

  The Roth IRA compounds tax free. After age 59½, the grandchild can begin taking distributions tax free or allow the account to continue compounding. If the grandchild needs money earlier (to buy a house, start a business, or pay for other expenses), the original contributions can be withdrawn tax free.

• There are many ways to help someone purchase a home. The down payment can be lent or given to the grandchild. Gifts can be made over several years if needed to accumulate an adequate down payment free of gift taxes. The grandparent can be a co-owner, or the grandparent can buy the home with cash and let the grandchild buy it from him over time. The last method allows the grandchild to obtain a loan that might not be available commercially. Even co-signing a mortgage or guaranteeing it can help a youngster get into that first home. 

• Help a grandchild invest. Though they are shrinking in number, some financial services firms allow an investment fund to be started with a small initial deposit and modest regular investments. Hussman Strategic Growth will open accounts with a minimum of $1,000, as does the Oakmark funds. T. Rowe Price welcomes small investors with minimum investments of $2,500. 

  In addition, there are a few brokers that allow periodic purchases of less than one share of an individual stock. These include mystockfund.com, buyandhold.com, and sharebuilder.com. Trades are made at limited, scheduled times, so these brokers are for long-term investors.

• Gifts of appreciating property are major aids to youngsters. Give $12,000 of property tax free today, and in 10 years after 7% annual growth the property would be worth $23,600. The $11,600 of appreciation is transferred to the youngster free of estate and gift taxes. 

  Gifts of property also can reduce the family’s tax burden. You can sell appreciated property and pay a long-term capital gains tax of 15%. Or you can give it to a youngster age 14 or older to sell. The youngster probably faces a capital gains tax of 0% to 10%.

• Teach grandchildren about money. Schools do not teach much about personal finance or economics. That is one reason so many people get into debt trouble early in their lives. Grandparents can help children learn about money, saving, and compound growth. 

One good step is to give grandchild the book The Richest Many in Babylon by George Clausen. It is a classic, easy-to-read explanation of reasons to save and invest. Then, help the youngsters set up investment accounts, choose investments, and manage them over the years.