Nephew inheriting over $500K

[marko]

It's up to you, but MMM seems pretty extreme. My reaction would be, "I just inherited 1/2 million, and you want me to live like THAT? So long!"

Agree. When I was a teen my dad always felt I should be allowed some fun with a portion of my money "otherwise, why bother!" he'd say.

 

[38Chevy454]

I'll only say that most 18 year olds do not have the discipline to invest the money and minimize the spending. So hopefully OP can show nephew the value of long term investments. Also need to emphasize the need to keep quiet about the money, all it takes is one gold digger to make life hell.

 

[mystang52]

$500,000 is a heckuva lot of money to me - it's beyond a fortune for a 17 year old. A talk about saving the money will fall on deaf ears, in my opinion. But if he's given "permission" to enjoy some of it he might be more open to advice. Show him, on good ol' fashioned open and paper, how he can graduate with no loan, own a respectable car outright, AND have a nice baseline nest egg to start out in life.

The message MIGHT sink in....and stay in.

 

[flintnational]

True story - 20 yo nephew expresses an interest in investing. I give him a copy of Berstein's "The Four Pillars of Investing". At 22 said nephew wants to buy and finance an expensive vehicle. I give him a spreadsheet showing the cost of the vehicle compared to a lesser car (paid for with cash) and investing the difference. He buys, finances and wrecks the expensive car.

Moral to the story - Uncles often have good advice. Nephews often ignore their uncle's advice.

Otherwise, I like what PB4 said.

 

[Bamaman]

I remember when $700k would be an incredible amount of.money. Make a few life mistakes and there might not be too much left.

Hopefully his college career will be stable, and he can make it through ROTC.

 

[Chuckanut]

Years ago as young wet-behind-the-ears young fool in college, I had an Economics professor that showed us two examples of saving and investing. One person at age 22 put $2000 a year into his IRA until 35 and then stopped. The other made no contributions until he reached 35 and then contributed 2000 a year until age 65. Everything else was the same (AA, returns, etc.). The question was who had the most money at age 65? The answer was the second guy, but only by a very small amount - a thousand or two at the most. It was a demonstration of the power of compounding and how just one or two extra compounding periods makes a huge difference in what one ends up with. That really impressed me and I started saving as much as a I could.

I would use such an example to emphasize the fantastic opportunity he as to get a huge jump on financial independence. Most of us here reached it somewhere in our 50's or 60's. This young fellow could hit it in his 40's if he plays his cards right.

And definitely advise him to keep his mouth shut around friends and potential mates.

 

[candrew]

Any advice in getting this conversation started would be appreciated.

Brother, can ya' spare a dime?

 

[Callitaday2022]

"According to a 2009 Sports Illustrated article,*78%*of National Football League (NFL) players are either bankrupt or are under financial stress within two years of retirement and an estimated*60%*of National Basketball Association (NBA) players go bankrupt within five years after leaving their sport."

I'd ask he he wants to be set up for the rest of his life, or be broke like most young men who get a large payout?
At that point, it is his call. Educate him if he ask.

 

[audreyh1]

Thanks for the response, all.
As some of you already surmised, the funds are currently in a trust and he gains access to all of the money when he turns 18. The inheritance came about as a result of an insurance payout resulting from a tragic vehicle accident where the dad lost his life. Accident happened when he was nine.

My SIL asked me to speak to him about where he should invest the money. His relationship with his mom is strained and they rarely speak. He is spending a week with us prior to moving to his dorm, as the school is near us.

Like many 17 year old before starting college, he does not lack for confidence and borders on arrogance when speaking to his elders, especially women. I don't have a close relationship with him until fairly recently when they visited us in AZ. While I don't want to be a surrogate father figure, he does pay attention when I speak about how I handle my money and retirement planning. I don't preach but speak authoritatively when talking about career planning. I was frankly surprised that he decided to enroll at a college in AZ ( they are from the Midwest).

I like the recommendations about the need to keep his inheritance a secret. He does have the LBYM DNA and will mention the MMM site to him. He rarely spends money on typical teenage things such as fast food and going out to movies. He works on his own car, does the maintenance like oil changes.

Great responses from this forum. Thank you.

Since this is an insurance payout from his Dad's unfortunate death, obviously the money was intended to get through college and established in a career and maybe even help with house downpayment, etc.

 

[MooreBonds]

I think it wouldn't be a bad idea for the OP to gingerly approach the general topic. Afterall, the OP did say that he has broached the topic of general finances with him, and he has at least seemed somewhat receptive.

As another poster suggested, the illustration of putting in one lump-sum at age 18 and letting it grow vs having to put in a LOT of money later on and still not catching up later can be a huge graphical way to get a point across.

Will he be like the other poster's young teen who still bought, financed, and quickly wrecked the sportscar? Maybe....but I'd feel better about things if I at least tried.

 

[Jerry1]

I wouldn’t give specific investment advice. I’d try to get him to a place like Vanguard for that. I’d focus on being there for him and see if you can nudge him in the right direction. A good relationship with a successful person who has no agenda other than the best interest of individual is invaluable and what I’d be trying to build. I think the first conversation(s) are about planting seeds and seeing if they sprout.

 

[Koolau]

Plastics!

No, wait. That's the graduate.

Seriously, only OP has any clue how/whether to offer/give advice. If I had a relationship with a youngster who ended up trusting me for advise, I think I would advise using at least SOME of the windfall for fun. Other than that, I think I would warn against sharing the windfall with "friends." YMMV

 

[Outby7]

So I spoke with his mom tonight about letting him know the exact amount of his inheritance. She agreed to do this. Her main concern is, he may end up spending most of it on girls,guns and cars, though he appears to be a frugal kid.

I had a discussion with him today that was focused more on the emotional aspects of adjusting to college life, nothing on his finances. Apparently, he is no longer with the GF.

I will approach the financial topic carefully. According to his mom, the trustee is currently taking about a $10,000 cut annually for managing the funds . No doubt the trustee will want to keep on managing it.

A Vanguard Roth IRA was opened up earlier this year and he has contributed the maximum allowed amount. This is a good start and I might use this as a conversation starter to talk about what to do with the $500K.
I plan to discuss this with him this weekend.

 

[akck]

It might be a better tactic to talk about his budget for the next 5-7 years. As others surmised, the funds are intended for his education and start on life. As mentioned, school will take a big bite of the funds, unless he’s getting aid of some sort. He’d be better off avoiding student loans, except subsidized ones (save funds to pay off later). The 5-7 years is if graduate school is an option, but also figure for his first year in real life.

After the budget is planned out, then see what remains of the sum. I don’t think there will be really that much, but I could be wrong if he’s getting a full ride. The amount available will indicate his options. Oh, and get the funds away from that manager as he’s eating away at his return. Hopefully, you’re willing to help him set up a cd ladder to cover his school years.

 

[chris2008]

He might be interested to watch what other millennials do.
I liked this a lot:
https://downsizeyour2080.com/2018/02/07/millennial-bloggers/
It includes links.


This is classic IMO:
How I failed my daughter and a simple path to wealth

 

[brucethebroker]

Guess I am a little more cynical than most who have weighed in. Just my opinion, but having had kids, grand kids and hundreds of students (as former HS teacher) at that age, "train wreck" is the only thing I can imagine. Any accessible money will be spent (even IRA money, eventually). Hopefully, wasting the $500k during youth will bring a lifetime lesson, and LBYM future lifestyle.

Speaking only to the men here, guys, how many of you would have saved and invested the money at age 18? How many of you had friends that would have been able to do it? Apartment rent, eating out, extravagant dating and new cars beckon. The money will never run out-right

I agree with the "don't offer advice unless asked by the kid" group. This won't be pretty.

 

[joeea]

Then the snide remarks started, like "hey the market went up x amount but the fund you told me went up only y amount, some great advice that" and then of course when the market eventually went south got accused of losing them money.


It's really a lose lose situation in many cases.

Unfortunately, it's a "You break it, you own it" situation many times.

 

[Dawg52]

Speaking only to the men here, guys, how many of you would have saved and invested the money at age 18? How many of you had friends that would have been able to do it? Apartment rent, eating out, extravagant dating and new cars beckon. The money will never run out-right

I agree with the "don't offer advice unless asked by the kid" group. This won't be pretty.

I've always been conservative and was 30 when I was 18 . I feel sure my lifestyle wouldn't have changed much.

As far as advice goes, I would offer my help but that's about it. You can't force advice on someone.......even a relative.

 

[marko]

Speaking only to the men here, guys, how many of you would have saved and invested the money at age 18?

I must be an outlier.

When I was about 10 or 12 I wanted a new baseball glove. IIRC, it was about $20 (early 60's).
Dad drove me to the bank with my passbook and I withdrew $20.

When I got back to the car, I was puzzled that while I took out $20, my passbook balance was about the same as when I went into the bank; I thought they made a mistake.

Dad explained interest to me! Wow!

He went on to say: "That's how rich people like your grandfather live and why they don't have to go to work every day". I was hooked! Fifty five years later, here I am.

 

[RunningBum]

Guess I am a little more cynical than most who have weighed in. Just my opinion, but having had kids, grand kids and hundreds of students (as former HS teacher) at that age, "train wreck" is the only thing I can imagine. Any accessible money will be spent (even IRA money, eventually). Hopefully, wasting the $500k during youth will bring a lifetime lesson, and LBYM future lifestyle.

Speaking only to the men here, guys, how many of you would have saved and invested the money at age 18? How many of you had friends that would have been able to do it? Apartment rent, eating out, extravagant dating and new cars beckon. The money will never run out-right

I agree with the "don't offer advice unless asked by the kid" group. This won't be pretty.

If it's probably going to happen with advice, it almost certainly will happen without advice, don't you think? So why not offer advice? Just don't take it personally if it's ignored. And don't be too pushy. Make suggestions, and lead him to conclusions as best you can, but don't dictate.

IMO a rough budget is the way to start.

- Is there anything you want now? (play it by ear, if he keeps it pretty small, like a new laptop, maybe a basic car, etc, take that out of the $500K and continue on. If it's big, just say, ok, let's see how that works out.)

- How much do you need to set aside for college? OK, do you think you'd want to set that aside in a very safe place, making a bit of interest but little or no risk?

- How much do you think you'll want each month during college for living expenses? OK, to do that, you'll need to put away a lot of the rest of the money and you can take out some of the dividends and let the rest grow, so you'll have more after college, for a house, or a start on retirement, or whatever. (Here's a good chance to see if you can back him off too much stuff now if he's gone overboard.)

Talk about the trustees $10K cut, and how he can avoid it if he does it himself. Or maybe he's better off with the funds at the trustee where its more work to get at.

Then you can start talking about the best way to invest it. For the college money, maybe VG Prime MM or similar will get him decent interest while being very safe. For the bulk of the money, explain index vs managed funds, and if he likes the index concept, suggest VG Total/Intl or similar for investing. For each thing, explain the concept and alternatives, and get buy-in from him rather than just saying "this is the best way". And talk about the long-term, not to be upset with short-term drops, but rather what happens when you buy high and sell low reacting to the market.

I dunno, that just seems the best approach to me, rather than giving him a solution like VG or a lifestyle like MMM before even helping him figure though for himself what his goals should be and setting a budget. Then you offer solution alternatives. The more it's his idea, the more likely he is to stick with it.

 

[MooreBonds]

I've always been conservative and was 30 when I was 18 . I feel sure my lifestyle wouldn't have changed much.

+1 - count me in the "I was 30 when I was 18" cohort. Hell, I might have even been 50! Although I fantasized about buying expensive fast cars when I was 10 or 12, I didn't splurge much in my teenage years with my caddying/grass cutting money. I actually splurged far more on my friends than on me (although that's just relatively speaking-maybe a few hundred a year for birthday gifts). I guess my biggest test was being tempted to buy the NeoGeo video game system. It was 24 bit (best at the time by Nintendo was just 8-bit). I was seriously tempted to plunk down the $700 at Babbages, but I never got to the point of actually planning to withdraw the cash to do it. Came close a few times, but temperance prevailed.

Hell, even with my current portfolio and NW, I have a difficult time loosening the purse strings even though I'm fine on my own - and that's also ignoring a considerable inheritance at some point in the future. I didn't magically get that way because I started my 19th or 21st trip around the sun.

Of course, this forum will have a higher incidence of those like me and Dawg than the population at large.

 

[Texas Proud]

I will just say that I am not a MMM fan at all... to me lots of lies from the little I read...


The only advice I would give nephew is to only take out principal for college and then only take out any income going forward... it is the people who keep hitting the principal that get hurt in the long run... your should be able to get 4% to 5% income which would be $20K to $25K per year on top of salary when he gets a job...

 

[Omalley]

I may be an outlier, but there is a chance that this young man can successfully manage this legal windfall.

40 years ago, when I was 7, I inherited $25,000 when my dad was killed in a car accident. I was fully aware of the insurance payment at age 7 and the funds were managed by my mom in a custodial account that were initially invested in CD's and later in mutual funds. While I legally had control of the funds at 18, I left them on autopilot in the the established mutual fund. The source of the windfall was different than winning a lottery, and I felt a strong responsibility to manage the funds wisely to honor the memory of my dad.

The funds were used to supplement tuition not covered by scholarships. I paid my own room/board working part-time during school and summer internships. After graduation, about $15,000 remained and it has continued to grow for 25 years. It is now a small portion of our combined investable funds, but along with a small inheritance from my mom's estate I still maintain a strong desire to use these two investments wisely to honor my parents.

If the OP can convey this sentiment in a non-preachy manner, it may resonate with the nephew. It seems like the nephew is already exhibiting LBYM tendencies, but I agree that keeping the existence of the money to himself will be a key to making it last.

It does seem like the OP should offer to help his nephew take control of the account, open a Schwab/Fidelity/Vanguard brokerage and invest the funds himself to avoid the $10,000 annual management fee that is being incurred. Placing the proceeds in a Target 2060 fund would be a reasonable start.

Omalley

 

[ESRwannabe]

Any advice in getting this conversation started would be appreciated.

I would advise him to set aside enough cash to pay for all four years of school, plus housing costs and put it in CDs. Since the money is going to be used up within 4 years I would not stress about trying to make a profit with the money. I wouldn't even put it in bond funds. I'd just go with CDs. Let's say that uses up $100k total.

I would then put the rest of the money into Vanguard's Managed Payout fund (VPGDX) to generate money for paying for his other bills like food, gas, books, etc. With $400k he would have $1,333 a month to use for paying his bills. It's actually lower than that. The current payout is more like 3.75% instead of 4% due to how the payout is determined by averaging the last three years data.

With this combo he should be able to cover all of his expenses for college in IMHO a very safe/reliable hands-off approach. So, he won't have to worry about it and can focus on school (or partying), and at the end of the four years he will probably still have over $400k in VPGDX.

P.S. I have $400k in VPGDX myself in my taxable brokerage account. It throws off around $1,250 a month which I have been re-investing.

P.P.S. If he planned on getting a job to pay his bills. Then instead of VPGDX I would put it all in Vanguard Total World Stock Index (VTWSX), which I also own in my taxable account.

 

[38Chevy454]

$10K per year trust management fee would go a good ways to paying tuition and school expenses. Get rid of that $10K fee, invest in self-directed at Vanguard or Fidelity, and use the $10K toward school expenses.