Dan Danford, CFP
Nov. 8, 2017
I was enjoying a chat with one of my best buddies last weekend. Like they often do, the conversation wormed its way around to retirement and finance. One of the things he said got my attention.
“I guess what I’d really like is to finance my retirement and then, when I’m done, pass along a bit of seed money for my son.”
Earlier, he’d mentioned that he is forecasting retirement out to age 98 for himself as a sort of insurance that he won’t run out of money. Financial advisors use similar figures in their professional financial projections for clients; it’s not that everyone makes it that far, but a significant portion of retirees do. One recent tally showed over 70,000 hundred-year-olds among our population.
“You do realize,” I prompted him, “that Tyler could be an old man before he inherits that seed money.” We chuckled, but it wasn’t all that funny. It was a moment of insight with dramatic consequences. Adult children today face a different financial path than ever before.
Seed money is a great idea. The notion rises out of our agricultural past. It’s the little bit today that grows into eventual prosperity. It is applicable to almost anything: crops, inventory, education, investments or even relationships. Put value into them today and they grow into something much more valuable over time.
But time is the key variable. Crops won’t grow in a week. Seed money for college is better spent early when lessons will be planted into a career that might blossom throughout adulthood. Inventory for a brand-new retail store takes a thousand turnovers to become a successful chain. Modest annual contributions can grow into a sizable retirement fund, but only if they compound across several decades.
So, this is my blinding insight. Meaningful contributions may require a different approach than you already think. It’s not bad to leave a nice bequest (everyone loves extra money), but similar amounts at age 35 can be far more impactful than at age 70.
Here are some terrific ideas I’ve used with my own family or seen among successful clients:
- Buy education for grandchildren so adult children can focus on retirement compounding.
- Buy inspiring vacations for the entire family. Everybody wins when grandparents create powerful memories. Without help, vacations are a luxury that many families miss.
- Loan money to children for sensible purposes. Your portfolio probably contains bonds (loans) to government entities and corporations. You can add a loan or two to family without hurting investment performance. Treat it like a genuine loan, though, with documentation and payment schedules.
- Invest in family businesses. Every business needs capital. Your loan or investment in a family business helps both you and your family. Again, treat this like any other investment. Consult your lawyer.
- Invest in continuing education. A college education today gets stale faster than any other time in history. People need to update skills and knowledge for work and personal satisfaction. You can help them grow and prosper throughout their lives.
This brave new world offers both challenges and opportunities. Most people tend to see the challenges instead of the opportunities. However, the rewards for some adjusted thinking can be rich.
Leaving something after you've passed will be welcome, no doubt. Helping your family while you are still alive, though, might be more inspiring and productive. Further, watching your family prosper—through education or some other helpful resources—can be a priceless experience. Why wait any longer?