There comes a time in every child's life when they realize they understand something better than their parents. Perhaps it's as a teenager when your parents can't program the GPS, or maybe it's as a young adult when you realize they don't know how to invest. While a parent who still uses maps is forgivable, a parent who doesn't invest is not.
Parents who don't invest are likely to run out of money in retirement. When this happens, it often falls to their children to make up the difference. As the sandwich generation will tell you, supporting parents financially can be a burden, especially when you have your own kids to support.
"The more children can help their parents save and invest, the less of a burden they'll face helping them cover the cost" later, writes Amin Dabit, the director of advisory services at Personal Capital in Denver, in an email.
But children, even adult children, teaching parents is a delicate operation. Adding money into the mix only makes the job harder. That laughter you hear is Dad chuckling at the notion of you teaching him about money.
Be a collaborator, not a lecturer. To help your parents shift their mindset from parent to student, approach the conversation as a collaborator rather than a lecturer, says Michael Farrell, managing director for SEI Private Wealth Management in Oaks, Pennsylvania.
"This isn't the cavalry," he says. "Don't ride in and take over."
Instead, begin by listening. "Start an open dialogue with [your] parents about their plans and aspirations," Dabit says. Do they have an existing retirement plan in place? What gaps stand between them and their financial goals?
It's about "intention over technique" and outcome-oriented teaching, Farrell says. To educate your parents, you first have to understand their intentions for their money so you can demonstrate how investing will help them achieve their goals.
Explain why they should invest. For any financial conversation to resonate, your parents need to understand why they should invest, says Ted Lucas, head of investment strategies at Hartford Funds in San Francisco. The reason is twofold: We're living longer and the cost of living is rising.
Thanks to advances in medicine and technology, "we're adding about one month [to life spans] every year," says Ric Edelman, founder and executive chairman of Edelman Financial Services in Fairfax, Virginia. So if you're still alive one year from now, your life expectancy will be 30 days longer than it is today. A 65- or 75-year-old today could easily live to over 100, he says.
Once your parents realize how long they need to plan for, you can broach the second element their money must contend with: the rising cost of living.
Every retiree knows health care costs increase with age. Thanks to inflation, so will the price of everything else. Add to this the precarious state of Social Security and Medicare, and it's easy to see how the odds are stacked against retirees, financially speaking. U.S. News & World Report's Retirement Readiness Calculator can show how long your parents' savings could last assuming a 7 percent annual return.
Visual aides are great teaching tools, Lucas says. Putting concepts on paper -- or computer screen -- can make complex topics tangible for parents.
Demonstrate the need for some stocks. Seniors are "often very cautious financially because they're afraid of losing money," Edelman says. "And that's a rational attitude." Their savings are all the money they have left, so they shelter them in bank accounts, CDs or bonds.
While keeping savings in "safe" investments protects them from short-term volatility risk, it exposes older adults to the longer-term -- and more severe -- risk of running out of money, Lucas says.
You can illustrate this with simulations that test a real or theoretical portfolio against thousands of potential market scenarios to determine the likelihood of a given outcome. For instance, Vanguard's free Retirement Nest Egg Calculator uses basic information, such as your current savings balance and anticipated annual expenses, to calculate the probability of those savings lasting given a certain asset allocation.
When the allocations for stocks, bonds and cash are adjusted, the calculator shows how those changes affect the outcome probability. For example, $1 million invested in 50 percent stocks, 30 percent bonds and 20 percent cash has an 83 percent likelihood of lasting 30 years. A portfolio of 85 percent cash and 15 percent bonds has a likelihood of only 30 percent.
Diversify with quality investments. People often have a barbell mentality when it comes to investing, Edelman says. They believe their money is safe in bonds or risky in stocks, but there's a whole spectrum of risk-return options between these two.
"There are 16 major market sectors and asset classes," Edelman says, and retirees should be diversified across all of them.
Edelman Financial offers a free Guide to Portfolio Selection tool to help construct such a diversified portfolio. After you answer seven questions, the tool provides a suggested allocation. Many financial firms offer similar tools on their websites.
Keep in mind these are only a starting point to portfolio construction. As risk-based tools, they don't take into account long-term goals or income needs. For a more comprehensive analysis, consult a financial advisor.
When choosing individual investments, look for quality, says Sam Waltman, senior wealth advisor at Kayne Anderson Rudnick. Riskier, low-quality investments are the first ones to sell off in a downturn. For stocks, this means companies with low debt, high returns on equity, stable earnings over time and stock funds that invest in them.
Don't put everything into the market. All investors should keep some cash on hand, Waltman says. For most retirees, 12 to 18 months worth of living expenses is enough to prevent needing to sell during market downturns.
Encourage selling outgrown investments. Your parents may be reluctant to sell investments they already own. Selling may imply they made a mistake by buying it. To overcome this reluctance, explain that they should sell because their situation has changed, not because the investment was a bad buy, Farrell says.
If emotions get too heady, bring in the cavalry. A professional third party allows you and your parents to focus on each other while the professional provides objective feedback and advice, Dabit says.
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