Can you meet the ‘lockbox’ challenge?
There’s a belief in my profession that over the next few decades, there’s going to be this enormous wealth transfer from one generation to the next, but there are signs that this may not happen.I believe one of the byproducts of our extreme debt era is the assault on the “family lockbox” — when clients use retirement savings to help an adult child in a time of financial crisis.The family lockbox is simple concept — it’s the savings and investment nest egg Mom and Dad have wisely put away over the years to provide a retirement lifestyle they have always envisioned. These savings should be considered sacrosanct and not used to buy toys or, as we see all too frequently, used to pay the debts of their children.It appears debt is the overriding reason the lockbox is under pressure. Just as the federal government has gone off the fiscal rails for most of the past three decades, we know individuals have as well. Individual debt has reached a critical mass stage, and too many children of lockbox parents are in deep, deep debt.It’s not surprising these adult children have looked to their parents to help them. Daily headlines tell the story of excessive credit card debt, divorce, job loss or a financial meltdown due to crippling out-of-pocket medical expenses.Let’s be clear. Sometimes, these children (who range in age from early 30s to early 50s) have no control over losing their jobs or dealing with a financially crippling illness. But all too often, they have lived beyond their means — they have the house of their dreams but have squeezed all the equity out of it by using it as a personal ATM. We also see a growing number of young college graduates who have returned home and need financial help as they get settled.Financial strains It’s important for lockbox parents to realize these financial requests are rarely small. One trend we see is multiple requests — once children have gone to the bank of Mom and Dad, they have a tendency to go there again. These requests can have emotional implications that have the potential to dramatically alter the best-executed investment plans — and potentially damage family relations.What I think most lockbox parents have in common is they are loving parents whose first instinct is to say, “Of course we’ll help.” They feel obligated to assist their son or daughter in a time of need, but it’s often less a decision than a gut reaction. Mothers seem to be more susceptible to be lobbied by the next generation, but fathers also are vulnerable. Parents who may have lost their spouse can also be easily persuadable.These parents, many of whom were raised by Depression era parents who emphasized savings and understood economic uncertainty, are confronting the strain of their own finances. It’s important for the children to realize that during the current economic downturn even the wisest and most conservative investors took a financial hit.When I am asked by parents about using lockbox funds to help their children, I have two important questions that get to the heart of the family dilemma. Will your actions enable your middle-aged child to continue to flounder financially? Or can you structure your assistance so you empower your middle-aged child to rebuild his or her financial independence — and begin working toward his or her own financial independence?Of equal importance, the children making these requests should ask themselves variations on these questions. Am I creating more difficulties for my parents while not solving my own core financial problems? Have I done enough on my own to deal with this crisis?My role is to be a financial adviser and educator and not their keeper. One of things I’ve learned is that I’m never going to help clients if it’s between blood and their relationship with me.Here’s another key: Families handle these extraordinarily emotional and difficult situations best when they have the most information at hand. My job is to provide tools and sober analysis while giving them financial assessments and potential outcomes. I’ve found that parents always appreciate it when you give them every opportunity to evaluate the situation from different perspectives.I believe the key to helping preserve the family lockbox is financial literacy — a virtue I have talked about for years to clients and high school students. We are already starting to see that young adults in their early 20s may be creating the next great generation of savers. Many are better informed about the dangers of credit card debt and a leveraged lifestyle.Granted, we don’t know if this trend will last, but they already have a jump start — and have seen the debt-ridden mistakes their parents made.Tom Sedoric, managing director-investments of The Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 800-422-1030 or email@example.com.