Point of View: Giving Too Much Money To Adult Children
Christine Benz offers ways to deal with excessive giving to adult children, long-term care expenses, and cognitive decline. The Long Term Care Insurance starts in Video from 2:40 to 4:50.
By Christine Benz and Jeremy Glaser of Morningstar.com | 07-05-2017 01:00 PM
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Video Transcript
Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. A lot of investors spend a lot of time worrying about portfolio risks, but there’s a lot of non-financial risks to your retirement plan as well. I’m here with Christine Benz, she is our director of personal finance, to take a closer look at three.
Christine, thanks for joining me.
Christine Benz: Jeremy, great to be here.
Glaser: The first big nonfinancial risk you wanted to highlight was giving too much money to your adult children. There was recently a new study here that highlighted how big of a problem this is for some people.
Benz: Right. This is something I had on my radar from my interactions with retirees. They have told me that their kids are sometimes making bigger asks than they are prepared to give them. But this Merrill Lynch study that came out earlier this year did say that the typical retiree gives $6,800 per year to adult children. And one thing that jumped out at me was 48% of the parents in the study said that they were willing to overextend themselves financially to help their adult children. So, certainly, there are some parents who have the wherewithal to give to their kids. They might derive a lot enjoyment from giving to their kids. But you’ve also got parents for whom giving a lot of financial help is a stretch and could potentially negatively affect their portfolio’s ability to last during their lifetimes. So, this is a problem.
Glaser: How do you ward against this though? It’s hard just to say no to your kids.
Benz: Absolutely. So, this is, I think how parents sometimes find themselves in this pickle, where they give more than they want to give or should give, but they have trouble of saying no.
I think the key first step is just as a parent, as a retiree, make sure that you’re educated about what a safe withdrawal rate is for your own portfolio. There have been other studies that have indicated that some retirees are confused about this, and they think that percentage withdrawals from their portfolio that are way too high are in fact sustainable. So, making sure that you understand, well, here is how much we can withdraw from our portfolio per year, that’s the key starting point.
And from there making sure that that communication is there. If a child is coming to you and making an ask that really is going to blow a hole in the budget that you’ve laid out for yourself, make sure that you are being clear about what problems that will create, if, in fact, you make that financial gift. I think there can also be improvements in communication among spouses. So, sometimes you have this spouse who is the person who interacts with the children, who is maybe the soft touch where the kids go if they need financial help. Make sure that both parties are communicating, the person in charge of the financial matters as well as the person who potentially is making that financial gift.
Glaser: The second risk is long-term care expenses. Pretty well-known that this is hanging out there. But what could investors do to try to mitigate this risk?
Benz: It’s a big risk certainly. Understanding the costs and understanding the probability that you might have some sort of long-term care expense during your lifetime, I think that’s a key starting point. So, many people know that if someone needs nursing home care in a rural area, it might be like $75,000 a year. But if you are in a big urban center, it can easily be double that amount. And getting your arms around what typical nursing home stays are in terms of their duration. So, when we look at averages, it’s anywhere from 18 months to 36 months. But certainly, you have those outlier situations where someone might end up needing long-term care for a very long time period. So, it can be a big unexpected cost late in life.
And there are a variety of approaches to tackling it. Certainly, for people who have not amassed much in financial assets, who are, say, well under the $500,000 threshold, for them Medicaid should be available–at least under current law should they have some type of long-term care need late in life. At the other end of the spectrum, very wealthy people may be able to self-fund long-term care expenses. And how much you need to self-fund long-term care expenses is kind of a moving target. But I would say you’d want to think about having well over $3 million in assets if self-funding long-term care needs were a goal for you.
If you are in between, you are a candidate for some type of insurance product. Of course, we’ve all heard the horror stories about skyrocketing premiums in the long-term care space. Think to help get an unbiased answer about whether and what type of product you should purchase, a fee-only financial advisor can make a lot of sense. So, someone who doesn’t have a vested interest in whether you buy the product or not and what type of product you buy. I think that’s really the place to start if you feel like you might be a candidate for some type of long-term care insurance product.
Glaser: The final risk is one that most of us don’t want to think about much, which is cognitive decline. Why is this a retirement risk and what can you do about it?
Benz: Well, certainly, for people who have been hands-on with their financial affairs, if they start to experience some type of cognitive decline, there can be risks. There can be perhaps trading activity that was unintended or risk taking that was unintended or maybe excessive risk aversion–or even financial paranoia, which is pretty common among people who are experiencing dementia.
It’s important to be pre-emptive about this. It’s, as you said, something none of us wants to think about. But to lay the groundwork in case you are unable to manage your financial affairs, certainly, the gold standard is to approach retirement with an eye toward hiring a financial advisor if you don’t already have one already, and that person can really make the transition quite seamless. If you are unable to manage your financial affairs, that person can be on board and be already watching what’s going on with your investment portfolio.
If you are not ready to flip the switch, if maybe you’ve been a DIY investor and you want to maintain control over your portfolio, another idea is to take kind of a hybrid approach where you bring aboard a trusted and financially savvy adult child to keep an eye on things. Maybe they are receiving duplicate trade statements as you make trades in your own account or maybe you give them rights to go online and see what your accounts look like and maybe raise a red flag if they see some issues. So, that’s another idea.
For retirees across the spectrum, I think it makes a lot of sense to simplify their investment mixes. That way whether you continue managing your portfolio yourself or someone else is helping you, things are just simpler all the way around. So, you want to think about transitioning away from a lot of small individual stock positions, maybe getting more into funds, maybe getting more into index funds that give you even fewer moving parts in your portfolio. Simplification is a great strategy at any age but especially during retirement.
Glaser: Christine, thanks for highlighting these risks today.
Benz: Thank you, Jeremy.
Glaser: For Morningstar, I’m Jeremy Glaser. Thanks for watching.
