The Money Talk

I am privileged to have close relationships with both my parents and my in-laws. We openly discuss a range of issues and celebrate and mourn together as life throws victories and defeats our way. But we’ve never really talked about money. That’s changed.

Recently each set of parents sold long-held property. First, my mother-in-law sold my wife’s childhood home; she moved out in the mid-2000s after living there several decades and held it as a rental until selling in 2018. Then, my father sold the Indiana farm his dad had purchased in the mid-1900s.

Their situations were different, but the financial result of each was the nearly identical: quarter-million-dollar windfalls for two middle-class baby boomers. While not exactly bad news, the payouts led to questions about best managing the sudden wealth injection. Because of our close relationships, these life events led us to discuss finances in more detail than ever before.

Through this multi-year process I now better understand my parent’s finances, and that has produced more focused, richer conversations. With the key caveat ‘this is not financial advice’ and with parental approval, this article details each situation, our discussions, changes to their financial lives, and lessons learned along the way.

I hope this article helps others seeking to have money conversations with loved ones.

The Beach House?

The call to action

I didn’t seek to open Pandora’s Box. The fraught nature of son-in-law / mother-in-law relationships is well known, and I’m not one to stress-test maxims without cause. “Not my money, not my business.”

But I was compelled to act after asking my mother-in-law about the money from selling her 1950s bungalow in Chic’s Beach. “Oh” she answered, “I deposited that money into my checking account”. Unfortunately for our friends at BB&T, I was in the midst of a one-year Financial Services deep dive at National Defense University’s Eisenhower School in DC, so I had some alternatives in mind. With the zeal of the convert, I evangelized methods to beat the bank’s 0.01% interest rate.

Nuts buried in the yard

After liberating those funds from a low-interest purgatory, she graciously allowed a more holistic review of her financial life. The inherited stock from her mother unconsidered since 2006. A dormant Virginia state retirement account from a teaching job decades ago. IRAs spread around various companies. Accounts at several national banks and local credit unions. Many of these accounts were “oh by the ways” that we discovered only after having three or four discussions on the topic. Like a squirrel rediscovering buried treats, each unearthed account led to another. How many more would we find?

And, as we lucky children who have served as tech-advisor to our parents can relate, along the way we had several check-ins with “the little book where I write the passwords”, and more than our share of online account activations, password resets, and hold time with customer care. Fun!

Our five goals of financial transformation

Once we had a decent handle on the accounts, I built a PowerPoint presentation that laid out – account by account – the snapshot of her financial life. The presentation showed the asset values, the average yearly returns, and the fees charged. Next, it showed alternatives that could increase returns while simultaneously lowering costs. Finally, I suggested a few goals to guide any changes being considered, among them:

1.????Simplify - find a single financial institution to centralize assets

2.????Balance - discover the best asset mix to improve return while properly managing risk

3.????Participate - gain some exposure to the equity markets

4.????Economize - drive fees as close to zero as possible

5.????Sleep well - grow comfortable and conversant with your investments

The Family Farm

Rain on the scarecrow

My mother-in-law sold her house in mid-2018, but my father’s path began during COVID. My paternal grandfather had purchased the family farm in Westport, Indiana, a bucolic property a stone’s throw from a 140-year old wooden covered bridge. Purchased in the 1940s, the 240 acres passed to my grandmother after my grandfather’s early death in 1952. Then, when she died in the 70s, ownership split four ways among my father and his three siblings. After two of those siblings died in the 90s, their shares split into eighths and twelfths.

The lead farm agent, a local uncle who was also a one-eighth owner, had assumed the management and bookkeeping of the tenant-farming operation. He advocated selling for over a decade. No other family members lived on or frequently visited the farm and most of the stakeholders had better uses for the equity locked up in the land, so why hold on to it?

That question had a clear answer; one of the siblings was holding out on the sale, insisting that the farm stay in the family. My dad’s sister in Seattle maintained the farm was the sole anchor that tied the dispersed family back to their Hoosier roots, a fair point. The owners were scattered in Texas, Washington, Colorado, Florida, and Indiana. Our family holds harmony sacred and finds conflict nauseating, so no one was prepared to force my aunt into a sale. We were facing further fracturing in the coming decades as ownership passed through the generations.

Then a solution emerged. A cousin (and future 1/16th owner) offered to buy the land outright. She owned a lucrative heavy equipment business in central Indiana, was liquid, and interested in farm ownership. This familial connection satisfied the holdout, and the farm was sold.

As my previous conversations with my mother-in-law provided useful insights, I shared some details of those talks with my father. The farm sale launched a similar discussion with him. Diving into Dad's financial life – a place I had never seen – was illuminating.

What’s a surrender charge?

After a 47-year teaching career, my father gets an Indiana state pension. Without complete understanding of the terms, he also purchased the offered annuity with the $220K “lump sum” portion of his school retirement. The 2014 annuity had a surrender charge of more than $20K until held for seven years. After this seven-year annuity accident expired in 2021, he was primed for a change. Also, he and my mother each had Social Security payments, Roth IRAs, traditional IRAs, another discrete IRA account contained the compensation from his unused sick leave upon retirement, and on and on. More buried nuts.

On the banking side, my Dad is a long-time member of Clark County Indiana Teacher Credit Union, having served on the board of that tiny institution in the 2000s. When the credit union was sold and all the employees replaced, he lost the personal connection he had valued, the new branch was located further from his house, and the service dropped off notably. Despite all that, he stayed with them. But he couldn’t quite articulate why. After discussing at length, we settled on the reason together: inertia.

As with my mother-in-law, Microsoft helped me sort and present the information from our conversations. After seeing his presentation, Dad agreed the same five goals – Simplify | Balance | Participate | Economize | Sleep Well – would be a good guide to his financial overhaul.

But what did fulfilling these goals look like?

Implementing the Five Goals

Simplify

Key to consolidating their accounts was selecting a financial home base that could provide:

1.????Banking (free checking/savings/CDs, and devoid of other account fees)

2.????Discount brokerage (to host the IRAs, and also non-retirement investing)

3.????An easy-to-use website with well-designed smartphone/tablet app

4.????Commission-free investing with a wide selection of low-fee funds

Each settled on the Ally banking and investment product, as it hit all these wickets.

Balance

As we discussed the best asset mix for each of them, we primarily discussed investment time horizon – or when they planned on withdrawing the funds. With increased equity holdings, return over time increased but so did short-term volatility. We had to balance the impact of short-term volatility versus the longer-term investment return, which would primarily benefit their heirs. Another consideration was the IRS’s mandate that they take required minimum distributions (RMDs) from their IRAs, since they’re both older than 72. As they transferred assets from other accounts into the Ally brokerage account, they elected to invest in exchange-traded funds (ETFs) from the Vanguard Group, including the funds VOO, VIG, and VYM among others.

Participate

An important engine of personal wealth generation is the US equity market, and the wealthy own stocks or stock funds at four times the rate of the working class. Neither my father nor mother-in-law are affluent, but holding US equities will provide them the same benefit the rich enjoy: wealth growth that historically outpaces all other alternatives. Investing in these Vanguard ETFs allows them participate in a low cost, diversified way.

Economize

Many don’t mind paying an annual 1% expense ratio on an investment (expense ratios are the “overhead” charged for running a fund). On my suggestion, my parents aimed to pay far less. The lowest expense ratios we discovered were on “index funds”. These funds track a broad swath of stocks and don’t attempt to “beat the market”. Instead, they try to exactly match a market index (the S&P 500 index, for example), hence the name "index fund". Because fund managers simply copy/paste the stocks from the index to create index funds, the whole enterprise is ultra-low overhead, which yields a rock-bottom expense ratio.

The Vanguard Group matched that low-cost benchmark, with many funds' fees at 0.05% or lower: that's 20x fee reduction! Compare that one tiny fee with their previous accounts' three layers of hefty fees: one-time sales charges of 5.75%, annual expense ratios of 1% or more, and some added annual “assets under management” fees of another 1%. When we took a close look, my parents were getting no additional value from those fees. But these fees were consuming thousands of dollars yearly, decimating their annual returns. So why pay them? They chose not to.

Sleep Well

Investing is logical, but it is also emotional. Both of these windfalls came from the sale of very personal assets. For my mother-in-law, the sale of the home where she raised her only child. For my father, it was the last physical connection to his own father – who had died when my dad was only eight years old. Given the similar connections, each had surprisingly different responses once the funds were liquidated.

My mother-in-law held no special affinity for the house sale proceeds; she was happy to invest in the equity market. But my father applied a “lock box” approach, insisting the proceeds be placed in an FDIC-insured account – in his case a savings account. He happily gave up significant future gains in order to guarantee the account value would never dip.

In the end, each selected the investment option for their windfall that matched their "emotional risk tolerance". A percentage point or two of extra return per year won’t make up for lost sleep.

Lessons Learned

1.????Loss Aversion

Statistics tells us that if offered a 50/50 bet to double or halve your money, you take that bet. The average outcome on risking $1 on that bet is $1.25, or a 25% profit. This is because the $2 and $0.50 results have equal chances of happening. But increase that bet to $10K or $100K, and you’ll get far fewer takers. The math doesn’t change, but the consequences do.

Loss aversion - or the preference of avoiding losses over achieving gains - is real, and can lead to discomfort when investing in the up-and-down equity markets. My parents remember the oil embargo, stagflation, the Asian financial crisis, the Dotcom bust, the 2008 financial crisis, and the COVID market downturn in ways that are more real to them than the 200-year US equity track record of an 8.3% return after inflation.

Most people are simply more fearful of losses than excited about gains.

Expect to encounter this phenomenon, and ensure to emphasize the “sleep well” criterion.

2.????Manage your expectations of the rate of change

Financial habits are established over a number of decades. We sometime retain accounts through inaction, without making active, conscious choices. But I often met resistance from my parents when we discussed making changes. People simply dislike making financial decisions without some time to contemplate – even when facing a mound of empirical evidence to act. So I found multiple touches on a topic, interspersed with alone time to ponder, to be a useful (if tiring) approach.

Be patient.

3.????Prepare for lots of asides

My parent’s love language isn’t interest rates and payment terms, but the process of sorting through decades of financial accounts dredged up a myriad of long forgotten memories. As previous accounts are disinterred, so are fond remembrances of former jobs, previous homes, and lost relatives.

Many of these accounts serve as unintended mileposts along life’s path.

Despite my desire to quickly achieve those five goals, I resisted hustling my folks through those retellings. Instead, I leaned into them and asked more questions to elicit more detail. This process was both a financial housecleaning and a relationship-building endeavor, no surprise since finances are such an intensely personal topic.

4.????Don’t underestimate adoption of banking apps

I assumed these 70-somethings would be slow to adopt new banking apps, websites, and other financial technologies; that was not the case. Both parents quickly embraced depositing checks with smartphones, transferring money via Zelle and Venmo, and monitoring their investments via website. They found joy mastering moving money through a few smartphone taps, especially when it replaced the Saturday morning trips to the bank to make those requests in person. But this ease of use can expose vulnerability too.

The convenience of apps makes people of all ages a target for swindlers, so stay vigilant.

5.????Transparency

A middle-aged son taking a sudden interest in the intimate details of a parent’s finances could raise some red flags, especially with his siblings. To the extent my parents were willing, I shared all I learned about their finances and what moves they were making with my two siblings. I felt this was key to head off any perception of conflict of interest and the family tension that could result. Frankly, fear of this perception is probably why some might not attempt a project like this. We quickly overcame that fear after considering the thousands in fees otherwise sacrificed to higher cost funds and advisers.

With my parents blessing, I shared the changes they made with my siblings.

6.????Acknowledge - but don’t submit to - financial inertia

Much of the motivation for this process was to exchange a dispersed, inconvenient, and expensive investment life for one more centralized, handy, and economical. But the financial institutions profiting handsomely from fees aren’t eager to stop collecting.

The account transfer process can prove a bit arduous – like cancelling cable TV service.

Those minor roadblocks sometimes tested my parent’s motivation. They asked questions like “Wouldn’t it be easier to just leave it alone?” After some back-of-the-napkin math, we found that the cost savings and increased returns on their sums would amount to tens of thousands each year. This spurred renewed interest in following through with the changes. But I never forgot it was their money, and therefore their decision.

Conclusion

This long process of discovery and learning with my parents gave me great insight into their financial lives, but it also strengthened our relationship.

Financial openness upgraded our non-monetary discussions too, giving us more confidence to openly discuss our concerns.

While not everyone has a bond with their parents that will permit it, I encourage anyone who can to start having this conversation.

Brian Downey is a national security expert in the Office of the Secretary of Defense. A TOPGUN-trained naval officer, he is transitioning from military service in 2021.