The following article comes from the U.S. News ebook, How to Live to 100, which is now available for purchase.
It wasn't the dread of long flights that kept the retired Kluevers, who live in Illinois and part-time in Florida, from vacationing on a distant continent.
It was the fear that dipping into their savings, even for a much-deserved trip, would compromise their diligent retirement planning and the financial legacy they wanted to leave their children and grandchildren, says son Steve Kluever.
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Like the Kluevers, many of today's retirees—and right behind them, the baby boomers who just reached or will soon hit retirement age—are expected to live longer than their parents. They also have to plan more extensively than their parents, who most likely collected a pension and Social Security benefits. Today's dilemma lies in how to finance these extended golden years, especially when many feel an obligation to also support adult children now or in the future. According to a 2011 survey commissioned by the National Endowment for Financial Education, 59 percent of parents said they are providing or have provided financial support to adult children no longer in school.
The paradox leaves many asking: What's the benefit of a longer life if it's one shackled by worry? And not just worry about your own retirement and extended care, but about the well-being of your offspring and the charitable causes you cherish?
It doesn't help that a decade of flat stock returns, record-low bond yields, and the highest unemployment rate in some 30 years hit just at the time early baby boomers began to join the retirement ranks. This economic rut has forced some to at least temporarily support their adult children, cutting into their retirement savings or income, and forcing some to become ultra-conservative with their own spending.
Markets may gyrate, but retirement targets are largely stationary. Experts, using Department of Labor statistics, generally estimate that it will require some $1.4 million in lifetime income and savings to support a respectable lifestyle through the early 80s. Live another nine years to age 90, and that number becomes $1.75 million. Already, financial advisors are telling clients to plan as if they'll live to 95 or 100, which will require a careful formula of conservative income planning and continued investment growth.
Those estimates largely cover longtime investors throughout a lengthy career. Of course, some retirees will have to make do on much less. In all wealth categories, determining if there's enough cushion in the budget to help multiple generations is typically best made on a case-by-case basis.
Emotions and economics. For many families, there's little question that they would jump to action if a child, even a grown child, is facing a financial emergency. Determining what qualifies as "code red" or setting the terms of such support is another matter. So is asking the tough question: Can I afford to help?
Multiple generations queried in a Metlife Mature Market Institute study agree that if a child is in trouble and needs money, they would want to help as much as possible, provided that the child is making a concerted effort to improve his or her situation. More than 4 in 10 respondents (44 percent) say they would feel a strong or absolute responsibility to help their adult child if he or she encountered a financial setback not of their own making, and a third (34 percent) feel a moderate responsibility to help with money in a situation like this. Forty-five percent believe that if their child was experiencing financial difficulty due to a job loss, divorce, or similar event, they would feel a strong or absolute responsibility to allow their child to live with them.
Respondents also felt strongly that retirees have an obligation to themselves. Survey respondents were asked to evaluate a hypothetical situation in which two 70-year-old widowers in good financial standing took two different approaches with regard to their four children who were struggling to make ends meet. The first retiree spent his time enjoying lower-cost activities in retirement so that he would be able to leave his children an inheritance that may help them get ahead.
The second retiree gave his children small gifts for birthdays and holidays, but believes it is time to enjoy his retirement and plans to spend his money on personal hobbies and interests. Asked to indicate which philosophy they agree with more, nearly two-thirds of respondents showed support for the second retiree, who is giving gifts to his children but is mostly focused on enjoying his retirement.
For Steve Kluever, his parents' perspective and similar tales from many of their neighbors in their 60s, 70s, and 80s hit a personal and professional nerve. He's vice president of product development for individual annuities at Hartford Financial Services. His parents don't need to help his immediate family or his successful sister's, but they still felt an obligation to keep their nest egg intact for their long-term care and their estate. Kluever thought it a shame that they didn't allow themselves to splurge a little.
He saw a need to increase the flexibility of variable annuities and has helped develop annuities, which his parents now use, that combine the protection of insurance (the death benefit does not decrease even when income is withdrawn) with an income portion and a growth component linked to the stock market. Nicknamed a "live and give" annuity, it's just the kind of approach that may appeal to some investors who want an income stream they can use now and in their 90s, and still have something to leave behind.
Family bank. There are some circumstances for which intra-family loans make sense in the best and worst of economies. Tapping mom and dad for the funds to finance a home, start a business, or build a nest egg lowers the borrower's rates and allows the senior generation to still collect modest interest payments. Both generations can benefit because the loan legally reduces a future estate-tax bill. That makes intra-family loans an attractive alternative to traditional loans for adult children and the sometimes-complicated tax shelters sought by their higher-net-worth parents.
"Ideally, your son or daughter would be able to pay you a fair rate of interest each month, providing you with some cash coming in [the IRS also wants a market interest rate or they'll look at the loan as a taxable gift]. However, don't do this if you can't afford to lose the principal," says Sheri Samotin, of consultancy LifeBridge Solutions, in a blog post. "While your child might have every intention of paying you back, that might never happen. Will you have enough money to take care of your own needs under that scenario?"
"The most important thing to realize is that money that you give away, encumber, or spend on behalf of your children today is money that very likely won't be available to you in the future if you need it. Be sure that your desire to help doesn't set you up for turmoil later," Samotin says.
Consider your child's money personality, say Scott Palmer and Bethany Palmer, financial advisers and authors of The Money Couple blog. Unforeseen economic circumstances have hurt even the best of planners, but some adult children may simply be bad with managing money and your assistance will perpetuate their lax habits. It's also okay to loan to one child and not another if, in fact, the reasons for needing help are different. The Palmers say it's important for a boomer couple to be a united front when it comes to offering financial aid to the next generation. Don't add to a potentially stressful situation with deception, handing out money without your partner's knowledge. Bottom line: It's okay to say no. Hurting your own finances now could potentially burden your children later if you're the one with palm extended.