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