My oldest daughter Madison just graduated from University and took her first professional position in the working world. A few days before she reported for work we sat down with her benefits package and talked about how she should handle her finances going forward. I’m sharing that conversation with you, in hopes that it might help you think about how to coach your own kids as the leave the nest and become employed, productive adults.

FIRST: I told Madison that first she should give 10% of her income away. My wife and I have the religious conviction that we should tithe (which means “tenth”) and we’ve taught that to our girls. But even if you don’t have any spiritual conviction behind your giving, it’s still a prudent way to live. Think about the crop farmer, who harvests corn in the Fall. When the harvest comes in he doesn’t sell all the harvest, or feed all of it to his cattle. He sets aside a part of it as “seed corn” to be planted next Spring so he’ll have a crop to harvest next Fall. This idea of setting some aside to replant is central to the cycle of sowing and reaping. If we expect to reap in life, it’s important that we sow. That’s why I told Madison to give 10% away.

SECOND: Commit to Save 20% for yourself, and live on 70%. If you don’t save, when you need to transition to a new job you won’t be able to, or when you want to retire, you won’t be able to. Saving is central to building a solid financial life.

THIRD: Of the 20% you save, put into your 401K the amount that your employer will match. In Madison’s case, that’s 6%. So for every dollar she puts in, the employer will put in a dollar, up to 6% of her salary. The 6% that Madison saves should go into the ROTH 401K, because all the data suggests that in the future, taxes will be much higher than they are today. Since a ROTH grows tax-free and distributes tax-free, paying the taxes today and saving the money where it will never be taxed again will pay off in spades when Madison goes to retire forty or fifty years from now.

FOURTH: Of the remainder that doesn’t get saved into the 401K—in Madison’s case 14%—I told her to begin sticking that money into a savings account until she has accumulated six months of income into this account. This isn’t savings to be used on a trip, or new furniture. Those things are additional. This money is being tucked away for an emergency, so when her transmission goes out, or she needs to replace an air conditioner, or has a health expense and needs to pay her deductible, or even if she should lose her job and have to transition to new employment, this six months worth of living expense will be there as an emergency fund.

FIFTH: When her emergency fund has accumulated six months worth of living expense, we’ll redirect this 14% into a different kind of savings. Not mutual funds, or stocks, but into an Indexed Universal Life Insurance program called a LIRP—a Life Insurance Retirement Program. This strategy will earn at a stock market rate of return when the economy is good, and that won’t lose money when the markets are bad. The return will just be 0%. It’ll be a fund that provides an amount roughly equal to the death benefit to cover long-term care or chronic illnesses if they ever occur. If she doesn’t need it for that, she can withdraw money from the account and spend it without ever paying taxes on it. Plus it provides a solid financial base to protect her family if she marries and has children. If misfortune strikes and she died, there would be a significant death benefit to provide financially for her children. Further, since these programs accumulate and distribute tax-free (like a ROTH IRA does), any money put into them is inoculated from future tax increases which are sure to come.

These LIRP programs are the cat’s meow of tax free saving for retirement. 85% of S&P 500 CEO’s have LIRPs, but most people have never heard of them.

If you aren’t familiar with these programs, reach out to me and I’ll send you a simple book you can read which will explain how they work, and why you should use them.

SIXTH: I told Madison that when she gets salary raises or bonuses, she needs to follow this rule: Save 50% and increase your lifestyle by 50%. That means a $10,000 raise allows you to increase your lifestyle by $5000, and increase your savings by $5000 per year.

If Madison will follow these six simple rules, she’ll be financially set.

How about you, what did you teach your kids about how to save and invest as they were leaving the nest? Leave your advice in the comments below.

By J. Barry Watts, Tax Strategist