On Immigrants, Kids and Money

The first generation of immigrants from India arrived in America in the 1950's, 60's and 70's. (Yes, there were earlier immigrants from India, but their numbers were very small until President Truman signed the Luce-Celler Act in 1946). Most of them were skilled professionals who established themselves in a variety of fields, especially science, engineering and health care. This generation has now reached (or is about to reach) retirement age. I have always been curious about how they are dealing with retirement.
By most statistical measures, Indian immigrants have been one of the most affluent groups in America. According to the 2000 U.S. Census, Indian Americans had the highest median income of any ethnic group in the United States. Anecdotal evidence, however, tells me that many of the older Indian immigrants who are eligible for social security are still working, and usually out of necessity. In several cases that I know of, this is because they financially supported their grown children.
While first-generation Indian immigrants were generally in well-paid, in-demand occupations, their children have taken a more mainstream American route. This should not be a surprise; a grand American tradition holds that every generation expects to have more choices than the one that came before it. As John Adams wrote:

I must study politics and war [so] that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.
To rephrase this in contemporary terms, we studied Microbiology and Mechanical engineering, so that our children could major in Journalism and Communications. Regardless of the fields they choose, the majority of second-generation Indian kids grow up to be independent, responsible adults. Unfortunately, you also find many adult children in the community who are financially dependent on their parents to varying degrees.
According to The Millionaire Next Door, one of the seven characteristics of those who successfully build wealth is that their adult children are economically self-sufficient. For me, one of the most interesting parts of this book was where it explained what the authors called Economic outpatient care, which is the financial support provided by parents to their grown children.
The first generation of immigrants never received any economic outpatient care. However, when it comes to their children, many of the same folks do not hesitate to go well beyond normal parental obligations. It is common to hear about Indian parents who pay for a brand-new car for their child upon graduating from high-school, tuition at expensive private colleges and medical and professional schools, down payment for the house or condo, and a $25,000 wedding. While the truly affluent can afford to pay for these for their children, many parents do this at the expense of endangering their own financial security.
A joke among financial planners in India is that the only retirement plan that many people have is a plan to have more children (since the traditional expectation was that the children would take care of the parents in their old age). It is truly ironic then, that it is often the children that stand in the way of their immigrant parents retiring at a reasonable age.
The authors of The Millionaire Next Door found that financial help given to adult children resulted in more consumption, rather than saving or investing. The more gifts they received, the less they accumulated. Gift receivers also did not fully distinguish between their wealth and the wealth of their gift-giving parents.
So what can parents do to raise children who are economically self-sufficient? The book gives 10 rules for affluent parents and productive children, which I have summarized below:
  1. Never tell children that their parents are wealthy
  2. Teach your children discipline and frugality, by example.
  3. Ensure that your children won't realize you're affluent until after they have established mature adult lives.
  4. Minimize discussions of the items that each child will inherit or receive as gifts.
  5. Never give cash or other significant gifts to your adult children as part of a negotiation strategy.
  6. Stay out of your adult children's family matters.
  7. Don't try to compete with your children, or compare your financial status with theirs.
  8. Remember that your children are individuals. Do not try to "fix" inequalities by providing financial help.
  9. Emphasize your children's achievements, not their symbols of success.
  10. Tell your children that there are lots of things more valuable than money.

Retirement account Contribution Limits for 2008

As I detailed in earlier posts on our Net Worth, most of our retirement savings are in tax-deferred retirement accounts, mainly 401(k) and IRA accounts. We have been able to contribute the maximum allowed amounts to these accounts for the last six years, and it has served us well. One of our goals is to continue to "max out" contributions to these accounts.

Now that we are well into the fourth quarter, it is time to look ahead to 2008. IRS has just updated the contribution limits for retirement plans for 2008.

The maximum pre-tax contribution allowed to 401(k) and 403(b) accounts for 2008 is $15,500, which is the same as for 2007. Those who are over 50 are allowed to contribute an additional $5,000 in "catch-up" contributions. This is again the same as in 2007.

Note that this is the maximum allowed by IRS. Your individual plan may have additional restrictions that prevent you from contributing the full amount. It is important to check with your plan administrator.

For IRAs (both Traditional and Roth), the contribution limit is going up in 2008 to $5,000, which is $1,000 higher than the limit for 2007. The contribution limit for those over 50 is $6,000.

The good news is that this will allow us to contribute more next year. The bad news, of course, is that we'll have to try harder to find enough money to be able to afford the higher contributions.

To be eligible to fully contribute to a Roth IRA, your adjusted gross income (AGI) must be under $159,000 (increased from $156,000 for 2007) for taxpayers filing a joint return. For single taxpayers, the AGI limit is increased from $99,000 to $101,000.

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