From the January 2007 issue of Boomer Market Advisor • Subscribe!

Boomers plan to live well and die broke

A client recently told my financial advisor that the advisor's job "is to make sure that when I am buried, the check to the mortuary bounces." I interviewed a man who said, "To my father, leaving money behind to his children was very important. He felt better about himself because he could. I do not feel that way at all. I believe I met my financial obligation to my kids when I got them through college. Now it's my turn."

These men represent what appears to be a growing segment of the older population -- a group facing longer and costlier retirements they believe leaving money to children is at best a secondary goal. This group presents an interesting financial planning challenge.

In estate planning, there are three types of clients :

  • Those who strongly value leaving an estate and will do what is necessary to ensure it will happen
  • Those who would like to leave an estate and are willing to make some sacrifices to help that occur
  • Those who place little value on estate planning and want to maximize the use of their money

The first segment often employs irrevocable trusts and/or buy life insurance to guarantee an estate of at least a certain size. The second segment tries to reduce spending and lives frugally in order to maximize what is left behind. There are signs that the proportion of people in the third segment is growing. In a recent survey by Greenwald & Associates, 52 percent of people ages 55 to 70 said they would not feel too bad or bad at all if they left no inheritance. In the same survey, 65 percent said it is very important and 16 percent said it is somewhat important to avoid having their children or grandchildren provide for them.

Most Americans would like to leave an estate to their children or grandchildren, but there appears to be a new financial compact between the generations, they will try to not depend on the younger generation for money, housing or caregiving in their old age. In return, they ask that there be no expectation of financial sacrifice on their part in order to maximize the size of the heir's bequest.

One comment on the complex financial planning issues involved in organizing client finances to maximize their own use of the dollars they've accumulated is this: The effort to leave an estate has a beneficial impact on financial security. The funds intended for an estate can act as a financial cushion available, if necessary, for one's own use. Even money left in an irrevocable trust has an impact on the beneficiary, making it more likely that he will receive help in an emergency.

But what about those who are trying to maximize the use of their money and minimize the amount of money they leave behind? They are less likely to have a significant cushion for support. Indeed, they are trying to spend as much as they prudently can. This places an incredible burden on the advisor to protect the financial security of the client.

The most effective solutions are those financial products with guarantees and protections that provide cushions if things go wrong or people live longer than average. Products such as annuities with principal protection, life annuities (with a guaranteed stream of income for life) and long term care insurance offer protection for people playing it close to the vest. These products can provide increased flexibility and security to those whose goal it is to live well and die broke. It is crucial for financial advisors to figure what each client wants in leaving an estate and then to formulate a plan that protects his financial security -- no matter what.

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