A New Way to Make Your Family Richer

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Now more than ever, people are worried about making ends meet in retirement. But one solution that few people consider could be as easy as getting your loved ones together with an integrated long-term financial strategy that addresses the needs of the elder generation and those of their children and grandchildren.

At this point, some of you are probably worried that I'm going to ask you to hold hands and start singing Kumbaya. But all kidding aside, there are several ways in which intergenerational financial planning sets the stage for huge successes and can be a win-win for everyone involved. Yet for whatever reason, most families resist such connections.

Breaking down the money taboo
In most aspects of our lives, we routinely rely on others for help. Whether it's your family, the people you work with, or lifelong friends, most of us have support networks built up to give advice and help us get through difficult times.

With money, though, things get tricky. When I worked full-time as a financial planner, I encountered countless families where the well-off heads of the family were extremely reluctant to pass down wealth to younger generations. Often, the concern was merely that they might need that money themselves at some point. But many are also worried that by giving their children and grandchildren too much money early on, they'll somehow spoil their ambition and make them dependent on inherited wealth rather than charting their own paths.

The downsides of lifecycle investing
Unfortunately, the financial isolationism that results from silence about money matters causes people to waste investment opportunities. Consider the problem that most families face:

Older family members have more resources but can afford to take less risk. Therefore, they tend to invest in more conservative investments that produce lower returns.

Younger family members would love to take more risk to get high returns, but they lack the capital to do so. Therefore, they miss out on some of the best wealth-producing years of their lives as they accumulate their own investing capital from the ground up.

In contrast, the ideal situation would involve somehow keeping the family's entire capital in high-return investments, while ensuring that those who are in the best position to handle the risk are those who actually bear it. I'd propose that the answer is to take a book from the annuity world and have younger-generation family members essentially guarantee their parents' and grandparents' financial futures -- in exchange for the opportunity to invest the family capital more profitably.

A proven business model
This may sound revolutionary, but in reality, it's only a private version of what Hartford Financial (NYSE: HIG  ) , Genworth (NYSE: GNW  ) , and Prudential (NYSE: PRU  ) have done over the years when they offer annuities to their clients. In exchange for an upfront premium, insurance companies offer a variety of guarantees and investment options that customers can use to ensure a reliable stream of income throughout their lifetimes. Then, in some cases, Hartford, Genworth, and Prudential turn around and seek out profitable investments of their own with that money. That's the business model that Warren Buffett has used to such notorious success at Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) : getting the benefit of the float to benefit company shareholders.

Admittedly, most younger-generation family members would have trouble ensuring the same guarantees as billion-dollar insurance companies. But the arrangement has two advantages. First, unlike insurance sales agents, family members don't have to earn a profit or commissions. Second, if the arrangement does work out profitably -- that is, there's money left over when oldest-generation family members pass away -- then the money stays within the family rather than going to an outside financial provider.

Don't stay silent
For family members to help other family members, you have to get over a big hurdle: You have to find a way to talk about money with your kids or grandkids. In many families, that's a huge obstacle.

But the benefits of keeping money inside the family rather than flowing out to Wall Street might well give you enough impetus to overcome those concerns. And if such a move allows you to keep your money invested in higher-risk, better-returning investments longer, then future generations will thank you for your efforts.

Stocks that are appropriate for the long haul are few and far between, but they are out there. Let me extend an invitation to you to read The Motley Fool's special report on retirement, where you'll find three promising stock picks for long-term investors. It won't cost you a thing, but don't wait; get your free report today while it's still available.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.

Fool contributor Dan Caplinger already talks money with his 7-year-old daughter, albeit at a basic level. He owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy covers you.

Read/Post Comments (7) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 09, 2012, at 3:42 PM, bzhayes wrote:

    I don't get it. You don't seem to be providing any answers... just hints. How did I setup a multigenerational investment? How do I annuitize my parents retirement accounts? How do my parents invest in stock without putting their retirement at risk?

  • Report this Comment On April 09, 2012, at 4:31 PM, TMFGalagan wrote:

    @bzhayes -

    The challenge I face with articles like this is that I can't give personal financial advice, and each family's situation is going to be different. The nice thing, though, is that rather than being stuck with rigid financial products that may not do what you want them to do, you can set up arrangements among family members that do exactly what you want -- within reason.

    The general idea, though, is letting children and grandchildren shoulder the risk of short-term market declines while giving them a greater share of rewards from taking that risk. Exactly how you go about that gets easier once you know what everyone's needs and resources are.


    dan (TMF Galagan)

  • Report this Comment On April 09, 2012, at 6:25 PM, spmccown wrote:

    My major concern here is that back in the late 90's, everyone thought they were a stock picking genius. I know some people who invested heavily in telecom, technology, .com, etc and wound up losing their shirt. A lot of the older generation didn't lose when the bubble broke because they didn't believe we were in a "different this time" market that most younger people did buy into. How is the younger generation going to cover the retirement annuity of the older generation they borrowed from if they lose big taking those risks that were huge in hind site again? It could take the whole family down and there is no time to recover for the older generation.

  • Report this Comment On April 09, 2012, at 11:00 PM, penywise wrote:

    Somehow I don't think the "guarantee" would be quite the same from a financial institution. Collecting might be more of a hassle too especially if there is some kind of drama going on. This idea sounds idealistic - but magnitudes riskier than traditional retirement planning. I think practically, this wouldn't often work they way it is envisioned. Of course some of you may have much more altrustic and idyllic families where an equal weighting of need and risk could be executed without concern.

  • Report this Comment On April 10, 2012, at 2:03 PM, bzhayes wrote:


    You only seem to be giving the general idea. I am not looking for personal financial advice, but I would like some idea how to accomplish what you propose. I don't understand any method of making this work.

  • Report this Comment On April 10, 2012, at 8:11 PM, wolfman225 wrote:

    Let me see if I have this right: As the elder member of the family, I grant my children/grandchildren access to my financial assets, giving them the opportunity to take advantage of their longer investment horizon by leveraging my money with their time.

    In return, they agree to secure my financial needs into retirement. Sounds like a fool's (small "f") bargain.

    Setting aside my doubts as to the ability of the younger members of my family to manage the risk and handle their assumed investment duties responsibly, forgetting for a moment the very real risk that they will "put it all on black" chasing the latest hot tip for penny stocks (not that crazy an idea, it's not their money after all), I agree with spmccown. Such a deal could take the entire family down.

    Again, how are the children going to be able to guarantee my financial security into retirement if they don't have the wherewithal to invest on their own now? Where is the money going to come from if their investments fail to produce?

  • Report this Comment On April 10, 2012, at 8:26 PM, TMFGalagan wrote:

    @wolfman225 -

    I think you're misunderstanding me. Physically turning over assets isn't necessary. The key is choosing an asset allocation that reflects not only your needs but also the longer time horizon of your family. In other words, you keep your money but invest it in a way that isn't necessarily in your sole best interest, in exchange for some benefit that they can provide.

    Granted, this won't work in families where only the elder generation has money. Your children would have to be able to bear some of the risk themselves in order for it to be worth anything to you.

    But if both you and your children have resources, then a mutually beneficial result is possible. I don't think that's such an unusual situation, even if it doesn't reflect your own situation.


    dan (TMF Galagan)

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