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How do I BEST set up my children for a financially sound future? May 21, 2008

Posted by shaferfinancial in Uncategorized.
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This question has been proposed to me by several clients.  So I decided to spend a little time discussing this important topic for parents.

First,  is education of course.  As soon as they start understanding the concept of money, you should introduce the theory of saving.  Create a savings account for them at a early age.  When they get to an appropriate age then let them handle the details.  Games like CASH FLOW can help too.  But beyond early education there are some realities that need to be dealt with.  So I want to concentrate on strategies parents can employ to deal with the reality of young adults psychological makeup.  Now, you are always going to have some children that from an early age are financially astute.  However, these kids are the minority.  The reality is, despite being correctly raised, most will spend their teens and twenties behaving with other priorities.  Part of this is the result of the slow maturation of a human brain where neurons that are actually created in the early teens are not wholly linked up to the rest of the brain until the twenties.  Environmental influences encourage reckless behavior that coincides with this lack of a fully mature brain.

So, although education is important, it will likely not take hold until later in life for most.  Combine this with the fact that most young adults make moderate salaries, including college educated ones, and you see why the evidence points out to the age of 40 where concerns for retirement and their financial future really emerge.

So, I have developed two strategies that parents with some disposable income can employ to really give their children a great start.

But first the rules:

1.  First, make sure you have a reasonable plan for acquiring wealth in place.  The best thing you can do for your children is not be a drain on their finances during your senior days.

2.  Second, don’t listen to those “experts” who think you should fund a tax deferred investment for your kids.  This makes little sense, the amount of time young adults have to retirement will assure a huge tax bill coming due when they take the money out of the 401K/IRA/Annuity.  Since they make moderate incomes, their current taxation is not the problem.

3.  Finally,  help them in their twenties and thirties (or even earlier if you can afford it), when they are least likely to help themselves or be able to help themselves.

4.  Set up the following accounts with the thought that you want to keep them from having full access at least to age 25.  Talk to a good lawyer to help you figure out how to do this!

So here is a plan for a $12,000/year budget, but you can change the amounts for any budget:

Set up a money market or savings account for the child or young adult.  Every month put automatically a deposit of $500 into the account.  Do this for at least 10 years.

Have the adult open a brokerage account or you open one under the child’s name.  Whenever there is enough money in the savings account buy one share of Berkshire Hathaway B’s (current cost $4400).

Buy a Equity Indexed Universal Life Insurance Policy for the child.  Fund it with $500/month for at least 10 years.  Make sure to have it set up to minimize the insurance face value under IRS codes.  You will need to have a fixed amount of time you plan on making premiums to set this up right.  

So let’s take a look into the future.  Let’s say you made a 15 year commitment to your child’s financial future, starting at his 20th birthday and going to he is 35 years old.  Now, Berkshire Hathaway has returned over 21% for the last 43 years and over 18% for the last 10 years, but lets be conservative and use 15% for the next 15 years.  For the EIUL I use a ultra conservative 6.5% rate of return and use the 15 year commitment.

When he is 35 years old he will have a brokerage account worth around $335,000.  His cash value  (I used a male for this example) would be $104,000 with a face value of $760,195. 

Now remember this is about the age where we find adults starting to take their future finances seriously.  But let’s say he does nothing else but maintain these two accounts.  What does it look like at age 65?  Well his brokerage account is worth about $29,000,000.  Yes, that’s right.  And his insurance account is worth $711,000.  Now, remember the brokerage account number is very speculative assuming that 15% rate of return for 45 years.  But I just wanted to give some perspective to this.  I don’t really believe that Berkshire Hathaway can continue its return for 45 years, but I do believe if can for the next 15 years.

Now you might be asking why fund an insurance account when the money will create so much more wealth in Berkshire Hathaway.  Two reasons, one we don’t want any temptation to spend from that brokerage account, so we have the cash value inside the EIUL that can be accessed for things like a down payment for a home/investment property or a wedding, or a temporary job loss, etc.  Remember it can be accessed tax free.  Learning to borrow and pay back from your insurance cash value is a valuable lesson as well as a cheap way to borrow.  Secondly,  a sound financial strategy for dealing with wealth are these EIUL’s which he will already have experience with.

So there it is.  An easy way to set up your children for an abundant future.  Dial the numbers up or down as your budget allows, but stick to it for at least 10 years and your children will have a living legacy, then give away your money at death to your favorite charity!


1. BawldGuy Talking - May 21, 2008

You’re like a voice of wisdom in the wilderness. This advice is what will enable children to reach post college graduation already in financially positive overdrive.

The best part? It’s just not that tough.

2. Celine - July 12, 2011

Hi, I know this is an old post but I was just advised to do a similar plan for our newborn son to help set him up financially and when I googled EIUL, I came across your post. I was hoping you could answer a few questions.

How early do you think an EIUL should be set up for the child ? as a baby ? not until he is 20 ? somewhere in between ? The reason I ask is because our broker suggested we start one now for our son who is a few months old. However, we are still trying to save for a house, and then with all our other expenses I doubt we will have $500 to sock away into an EIUL.

On that note, do you think in our situation (still trying to save for a house, not a lot extra cash laying around) that an EIUL is better for me and my husband as life insurance ? Or would a term life policy be better at this point in our lives ?

Lastly, my husband has virtually no retirement savings and he is in his early 40’s so that is also something we need to save for. Do you think starting in his 401K plan is better or doing an EIUL ? or both ?

As new parents, my main goal right now is to get ourselves insured and also to start some kind of savings going for our child.

3. shaferfinancial - July 13, 2011

First off get some life insurance on your husband [and you if you work], probably term since it is cheap. You can get $1M for a small amount of money. Second, take a look at your financial plan. Do you have one? Because it sounds like you don’t. If you don’t have one here is how you can go about doing it.
1. Set goals. What are you trying to accomplish?
2. Check options. How to get to your goals?
3. Set priorities. What is most important to you, owning a home or having money for retirement? This is the hard one, because given the age of your husband you might not be able to do both in the short term.

Homes are great to own most of the time, but they also add to your expenses considerably. These days you need to save a lot of money just to get the down payment. I would do some soul searching about this. Buying and living in your own house sounds great and provides some good emotions but it is rarely the best investment you will make.

Start saving every month. Build up at least a 6 month reserve before you do anything else.

Once you have your reserves and your goals set then you might consider an EIUL on you or your husband if it fits into what you are trying to accomplish.

You aren’t anywhere near the point where you should consider an EIUL on your child. The best gift you can give your son is you and your husbands financial stability.

4. Quinn Kaipio - October 27, 2011

lets say you are able to fund an eiul for a newborn or young child with a thousand dollars, 2,3,4, or 5,000 single premium payment. at a consercative 7% rate of return estimated growth. My questions are can you just use a single premium to pay for the eiul without it be considered a MEC? Second, what would be the amount of the policy at age 65? thirdly, what would be the best case scenario for a parent who could afford to fund an eiul? Forth, and final question, what would the policy face amount or cash value be if an eiul was opened at say age three, with a 100. a month premium and a 300. a month premium at age 65? same 7% estimate rate of return. Thanks QOK California

shaferfinancial - October 29, 2011

Single premium payments are always MECs.
Using your 7% number and assuming a male; $100/m would be a shade under $1M while $300m would be around $3M in accumulated value. I have set these up for folks and mostly they try to be as aggressive as possible and limit the time premium is paid.

Quinn Kaipio - November 4, 2011

thank you i was unaware single premiums were MEC, but it makes sense.

5. quinn kaipio - September 13, 2012


6. the quinn - July 4, 2013

Spot on with this write-up, I truly believe that this website needs far more attention.
I’ll probably be back again to read through more, thanks for the information!

7. simmy - December 1, 2014

I am considering opening an eiul account for my pre-teen but not sure about it. Currently I can afford just $75/month. Considering the cost of insurance etc, that doesn’t leave much cash to grow. Am I missing something?

shaferfinancial - December 2, 2014

$75 month won’t get you far in any strategy including using an EIUL. I would have to have a discussion with you on your financial profile to really see if an EIUL is a good fit for you at this time. Feel free to contact me through the blog to set up a time to talk.

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