Seeking Alpha

How To Retire (Your Kid's Edition): Work Ethic Can Be Overrated

by: Colorado Wealth Management Fund

Some Seeking Alpha users have no problem with transferring wealth to their children at a young age, while others are adamantly against it.

It comes down to your worldview on the notion of work ethic: What it means and how being handed a large sum of money as an adult will impact it.

There’s no right or wrong answer, however thoughtfully addressing the subject can help parent-investors find a solution they’re comfortable with.

Mom gives gift to childBy giving our children the gift of a financial head start, we're also giving them freedom of choice. Source

The most recent article in our “How To Retire (Your Kid’s Edition)” series triggered interesting discussion in the comments. In this installment, we review the reaction and consider the notion of work ethic alongside investing savvy amid the quest for financial independence ASAP.

As much as we love teaching and talking about the mechanics of investing, we’re equally as excited to dig into the worldviews that influence our investment decisions. The way we see things politically, psychologically, and emotionally absolutely impacts the choices we make with our money, particularly how we treat our kids with respect to money.

How much do we give them? When do we give it to them? Do we help them save for college? Or retirement? Or both? If we’re wealthy, how do we spread that wealth without raising spoiled brats? If we’re struggling as adults, how do we best provide for our children and their future while trying to stay afloat ourselves and as a family?

Still others choose to build wealth by investing in diversified portfolios, aiming for total return or income, or a mixture of both. We do this in our own investing, and members of The REIT Forum benefit from our years of experience and diligent effort in finding and vetting solid opportunities in equity REITs, mortgage REITs and preferred stocks to achieve their goals.

Speaking of goals, as we discovered in the above-mentioned last article in this series, some Seeking Alpha users are adamantly against helping your child save for his or her retirement from birth:

  • I think setting them up or helping them with the retirement account is a form of learned helplessness.

  • Whatever happened to self responsibility?

Others come in at the middle ground:

  • We opened stock accounts for our children and then to fund it, we told them for every dollar they invest in it, we would match it dollar for dollar. But only if that money came from an outside source, not us paying them for a job or something.

  • I worry a bit that by doing this they won't feel the drive to grind and work as hard as I did to get where I am, which in return gives you great satisfaction and an appreciation for the value of hard earned money. My kids are already on the spoiled side I worry about enabling them too much. I will help them make their first roth contribution.

And others are fine with giving their kids what we defined an 18-to-20 year head start on retirement or whatever else they might use the nest egg we hand over to them for:

  • Some of us do realize we should help our kids as we BEST can. We feel good about it and our kids will be thankful after we are gone. Perhaps they could do some good with it like start a business or invent something good for humanity.

Subsidizing Your Child’s Future

Here’s how Investopedia defines a subsidy:

A subsidy is a benefit given to an individual, business, or institution, usually by the government… The subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public, given to promote a social good or an economic policy.

In the case of saving for your child’s retirement when he or she is young and handing over a large sum of money to them when they hit 18 (or some other age), we’re effectively subsidizing their future. We’re removing the “burden” of starting out with nothing and building a retirement nest egg from zero or some other relatively small number. If you buy into this sort of thing, you could extrapolate the argument to say, we’re promoting something like a “social” or “economic good” by throwing a new adult into the world in a more financially stable position than he or she might otherwise be in.

That’s one way to look at it. Here’s another.

By taking your hard-earned money and giving a significant amount of it to your child at or around the age of 18, you’re not teaching work ethic. You’re giving them what amounts to a handout and fostering “learned helplessness.” Our kids should have to start out the way most of us (presumably) did. By struggling a bit and learning that hard work, not their parent’s position of financial strength, will afford them the things they desire, be it an early retirement, a house in the hills, or a fancy sports car.

It’s the idea that you’ll find work that earns you the income you require to not only live, but save enough over the years to accomplish any or all of the above and more. I chimed in via the comments as well with a thought I think contributes to this debate:

My job isn't what defines me. I'd be an egotistical jerk if I defined myself by my income. My work ethic defines me. The way I treat people who are less fortunate defines me. The way I treat animals defines me. The way I contribute to the next generation defines me. A man shouldn't be measured by his income, he should be measured by his outcome.

With this in mind, does handing $25,000, $50,000, or even $100,000 or $200,000 over to a child when they become an adult, automatically destroy work ethic? Or are the other things you teach children, separate from the money you might end up giving them, what ultimately define them as adult human beings?

By giving our children a head start on retirement - or, at the very least, some financial breathing room early in adulthood - are we not simply providing them the opportunity to be not merely harder, but smarter workers? Are we taking away some of the urgency to run out and find something to sustain themselves so they can latch onto to what they truly want to do or choose work that fulfills and satisfies even if it doesn’t bring home the highest possible paycheck?

Put another way, we’re not handing out a free ride, we’re giving our children the gift of choice.

Because even if we’re fortunate enough to give them $200,000 at age 18, this doesn’t mean they’re set for life. Rather, they have the head start on retirement we have been considering as well as a cushion as they figure out what and who they want to be.

A Sample Portfolio

Here’s how a portfolio made up of dividend payers for future generations might look:

Ticker Company Name Dividend Yield
VGSH Vanguard Short-Term Treasury ETF 2.27%
SCHO Schwab Short-Term U.S. Treasury ETF 2.22%
AGNCN Preferred share from AGNC 6.82%
ANH.PC Preferred share from ANH 7.52%
CHMI.PA Preferred Share from CHMI 8.06%
NWN Northwest Natural Gas Company 2.73%
PG Procter & Gamble Company (THE) 2.54%
EMR Emerson Electric Company 2.89%
MMM 3M Company 3.53%
ESS Essex Property Trust 2.38%
CINF Cincinnati Financial Corporation 1.93%
KO Coca-Cola Company (THE) 2.99%
JNJ Johnson & Johnson 2.86%
CWT California Water Service Group 1.47%
TGT Target Corporation 2.36%
SWK Stanley Black & Decker, Inc. 1.86%
MO Altria Group, Inc. 7.74%
SYY Sysco Corporation 1.97%
BKH Black Hills Corporation 2.62%
UVV Universal Corporation 5.74%
WMT Wal-Mart Stores, Inc. 1.77%
PEP Pepsico, Inc. 2.80%
XOM Exxon Mobil Corporation 5.01%
MCD McDonald's Corporation 2.41%
NNN National Retail Properties 3.64%
O Realty Income Corporation 3.48%
LOW Lowe's Companies, Inc. 1.96%
KMB Kimberly-Clark Corporation 3.08%
ED Consolidated Edison, Inc. 3.26%
T AT&T Inc. 5.38%
TROW T. Rowe Price Group, Inc. 2.73%
CVX Chevron Corporation 4.09%
PM Philip Morris International Inc. 5.98%
VZ Verizon Communications Inc. 4.06%
HP Helmerich & Payne, Inc. 7.54%
AVB AvalonBay Communities Inc 2.80%
EQR Equity Residential 2.59%
CPT Camden Property Trust 2.86%
ESS Essex Property Trust 2.38%

Of course, if you want to dive a bit deeper than the standard stock listings and their dividend yields, you might take a closer look with our into our Classic Dividend Portfolio Tracker:

Source: The REIT Forum's Classic Dividend Portfolio Tracker

This appears to be a pretty diversified portfolio of income-generators, but the allocations may not be everyone’s cup of tea:

Whatever your portfolio design, it’s important to consider how flexible your long-term goals are (whether for you, or your kids, or both), and how diversified you want the positions to be within the portfolio itself.

In our opinion, this doesn’t necessarily crush work ethic if you’re raising a well-rounded, thoughtful kid. It amounts to feeding them fruits, vegetables, and other wholesome meals, rather than fast food because we’re privileged enough to do so. Offering a head start on physical health isn’t all that different from doing the same for financial health. It’s about teaching balance and providing context. About doing good for your children alongside the suggestion that they’ll return the favor to someone else (or the larger society) as they take their head start and gratefully run with it.

Your Turn

What do you think? Does setting up your child with a ready-made retirement fund at age 18 destroy their work ethic and teach them "learned helplessness," or do you think it's a good thing to help them get started out in life with more financial security? Let us know your thoughts in the comments.

Disclosure: I am/we are long AGNCN, ESS, MO, WMT, PM, EQR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.