understand the value and purpose of their work and of material things. We do this by understanding and perhaps redefining our own money personalities and working to create positive financial socialization for our children.
What this book is not is a prescription telling you exactly what to do. I firmly believe there is no one way to parent and particularly to help children engage with money in a positive way. Each family and each child within the family is unique. My hope is that you and your family will find the path that works best for you. Throughout this book you'll find lots of studies, data, and numbers (it is a book on finance after all), but perhaps even more importantly, you'll find examples of how to talk to your children about money and why these conversations are crucial to their financial wellbeing. I'm sharing not only lessons I've learned from my career in finance, but my own money mistakes and lessons learned so you can teach your sons and daughters how to “fish” and become financially prepared for adult life.
Journalist Sydney J. Harris made the brilliant analogy that “the whole purpose of education is to turn mirrors into windows. When you gaze into a mirror, the only things you see are your reflection and a limited area around you. However, when you look out a window, the view can be almost endless.” Helping educate yourself and your children about their behaviors toward finance will, without a doubt, have a dramatic change on their view of money, seeing it as a tool offering endless possibilities and helping to enrich their quality of life as it relates to their financial wellbeing.
1 Background: A Little Bit of “Retirement” History
Developing a healthy relationship with money and finances is a lifelong journey. That journey starts at young toddler age, extends throughout your entire life, and has ramifications at each step, all the way to the handling and distribution of your estate after you are deceased. Yet in this country we are generally fixated on one and only one step or destination, rather than on the journey. That destination is what we have labeled retirement. In this book, my goal is to give you and your family tools to manage your finances and goals throughout the journey, with the understanding that our children are being raised in a very different time, one in which “retirement” must be redefined or simply dismissed as the “goal.” I thought it prudent to provide a quick history of how retirement came to be and how it must change for future generations.
In the late 1800s, when the concept of retirement as a government policy was adopted first in Germany under Otto Von Bismarck, “retirement” at that time had a very different meaning. Bismarck introduced the idea of retirement as a modern government pension, a financial benefit for workers once they reached the age of 70 and most could no longer perform physical work. Before this concept, if you lived, you worked; there was no stopping or retiring from one's job. Otto wasn't motivated by compassion for the plight of the working class, but rather wanted to preempt a growing socialist movement in Germany before it grew any more powerful, and therefore provide the people of Germany with financial support, something they couldn't manage on their own and would keep the people happy with his leadership. This new pension provided government financial support to the aging population in Germany and was the first time in history people began to plan to retire (Source: https://www.theatlantic.com/business/archive/2014/10/how-retirement-was-invented/381802/).
This idea of working to live quickly changed and people across the globe became enamored with the idea that they could stop working at a certain age, and with the financial support of the government live out their last few years of life taking it easy. As evidenced by the labor force participation rates, “retirement” as we know it today is a twentieth-century phenomenon. People in the late 1800s and early 1900s had shorter life expectancies and typically ran their family farms for most of their adult lives. The rich managed their estates. No matter their status, most continued to work until they died. Consider that in 1880, the labor participation rate of men age 65 and older was 78%. However, through the beginning of this century, the participation rate of men over 65 in the workforce has steadily and dramatically declined. (In 2000 the rate was just 18.4%!)
Retirement became a natural expectation and has come to be viewed, ideally, as an extended period of independence and leisure. So, what has changed? A lot; the shift from agriculture to industry had a significant impact on how people worked. No one truly retired from an agriculture position. That agricultural work was typically not just a way to earn money, but a way to live and have a home. As evidenced in many early wills prior to the twentieth century, a “retirement plan” entailed having as many children as possible so that, in exchange for the house and farm, the children would care for their elder parents in their final years of life.
With the Industrial Revolution, younger generations were able to leave the home to find different types of work and increase their standards of living. This generation entering the workplace created a shift from people having children as a plan for caretaking in retirement to having bank accounts. As children no longer stayed at home, elders could no longer rely on their children to care for them in retirement as they aged, so we also saw a decrease in the number of children being born and coupled with an increase in savings rates.
With the Industrial Revolution also came the five-day workweek, something unheard of in agriculture. To keep workers happy, employers started providing benefits in the form of pensions or other defined benefits that employees would collect only after decades of service. American Express offered its first pension as early as 1875 in order to entice workers to join the company. These defined benefits were “guaranteed” specific dollar amounts to be received each month, funded and paid entirely by the employer if you worked for the company until, say, age 65. Age 65 was seen as “old age”; there were studies that showed a mental and physical decline in workers over the age of 60 and so 65 became known as the target when one should retire. We quickly shifted from working to live to working to retire.
Enter Franklin Delano Roosevelt's first rendition of Social Security on August 14, 1935. The purpose was to provide public pensions to those not covered by private pensions. Social Security was paid into by most employees via a tax from their paychecks and a “pension” payment was made at full retirement age, which (at the time) 65. Taxes to fund Social Security first started being collected in January 1937 and the first benefit payment was paid in 1940. Today, Social Security has morphed and expanded significantly from its original form (more on that later).
Another important, and probably the most critical factor in our view of retirement today, is the marked and continual increase in Americans' standard of living during the Industrial Revolution through today. Today, Americans enjoy a standard of living commensurate with eight times the average American income of a century ago. The rise in opportunity, income, and increased savings rates has provided many the opportunity to spend time and money on things previously only available to the wealthy. Additionally, global industry has decreased the costs of many goods previously considered luxury items.
In 1803, the economist John Baptiste Say explained what is now called “Say's law,” which states, “It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value” (Source: J. B. Say, A Treatise on Political Economy, 1803, pp.138–139). In other words, supply creates its own demand.
At no time in history was this more accurate. Industry was creating more and more goods at affordable prices and, for the first time, private companies or government were funding decades of work-free years. As a result, masses of Americans had extra time and money to spend. This is how today's ideal vision of retirement came to be. This created an environment where savers and spenders both were in a good financial position. The only difference was how much money was left to their children at the time of their passing. Big savers didn't have to spend much, if any, of their own savings on retirement simply because the access to the other financial resources was enough to cover their spending while spenders continued to spend
