Sara, a young adult beginning to balance her lifestyle spending and investing, doubled her investments and boosted her tax savings with a gift — paired with insightful guidance from her grandfather.
- Families can use annual gifts to help younger family members invest at reduced prices with the advantage of growth over a long time horizon.
- Parents or grandparents can use annual gifts as a way into a productive conversation with younger generations about saving, rather than treating every gift as a chance to spend.
- By considering all your financial resources across all family members, you may find additional ways to leverage depressed prices.
This series offers examples of how families can shift assets among generations to make the most out of a difficult market. Read the rest of the series here.
Fred is a 73-year-old retired business owner who lives comfortably on returns from his invested savings.
He has lived, worked, saved and invested through several market cycles and feels confident that downturns always reverse in time. Plus, he has a plan to fund his near-term expenses from selling so-called “safe” assets (stable diversifiers, such as high-quality fixed income, Treasury Inflation Protected Securities and cash) so he can avoid selling equities at depressed prices. He is confident that his longer-term goals, such as his estate plan and regular gifts to family, are aligned with the amount of risk he has built into his portfolio. Fred looks forward to giving his five adult grandchildren the maximum tax-free cash gift every year ($17,000 in 2023).
His 26-year-old granddaughter, Sara, is a first-year associate at a midsized law firm in the San Francisco Bay area. She is new in her career and frustrated with the “good advice” to invest as much as she can to take advantage of tax-deferred saving, compounding returns and the market downturn’s depressed asset values.
"Seeing my family flourish has always been my greatest joy. Now that my grandchildren are embarking on adulthood, I love being able to give them an annual financial gift. I can hardly believe it’s true, but they are adults — they can choose how to spend the money. It is a gift, after all. But I also want to help them think long-term and make good choices to become financially independent and secure.”
“I would love to invest while asset prices are down. But the reality is there just isn’t room in my paycheck for urban living expenses and maximizing my 401(k) contribution. I want to make smart financial choices, but I also want to enjoy myself. Skipping a latte or concert is not enough to help me retire early, I need to do more than that.”
Fred knows there is a way for Sara to use his gift to both save and cushion her income. He invites her to lunch with his financial advisor and they work out a plan.
Sara’s retirement plan is the most tax-efficient investing vehicle she has available to her, so they outline a budget that allocates Fred’s $17,000 gift among her monthly expenses, which allows her to maintain her lifestyle spending while contributing the annual maximum to her 401(k).
“It was definitely exciting to think of the ways I could spend my grandfather’s gift right now,” Sara said. “But I also really want to make smart long-term choices and I know that when the market is down I should take advantage of the lower cost to invest. I’m glad I have my grandfather’s perspective alongside his gift to feel confident in my decision.”
By using her grandfather’s tax-free gift to backfill her monthly budget and maximize her 401(k) contribution, Sara is able to both invest at low asset values and reduce her taxable income by the amount of the gift.
Accelerating Sara’s portfolio
By strategically deploying her grandfather’s gift, Sara added $3,960 in tax savings to her day-to-day budget, and by boosting her 401(k) contribution, added the potential for $29,549 more in returns after 10 years.
With his gift, Fred equipped Sara to take action and see the results for herself. He also used this as an opportunity to discuss his hard-won perspective about saving, investing, and balancing today’s needs with the future.
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