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Passing Along Family Wealth Wisely

Kat Grigg

I talk to a lot of parents who want to actually see their adult children enjoy the wealth they will one day pass on to them.


But these same parents don’t want to give themselves broke so that those same children will one day have to take care of them financially. And they also don’t want to create dependency of their adult children on financial gifts they might give them.

The secret to finding balance is having a plan.

Balance requires efficiency, because your resources are limited, but your priorities are not. Balance requires determining how much of your resources are needed to achieve one priority, while leaving enough to accomplish others.

Here are some questions to work through as you put together your plan for passing along your family wealth.

What amount of income do I want (monthly or annually)? And what amount of my total wealth do I need to devote to this purpose?

Here, you’ll need to work backwards. The first step is to determine how much you want to live on each month in retirement. Make it a number that allows you to do all the things you want to do, plus a margin for things you didn’t count on. Keep in mind you may want to travel more than you did during your working years, or you may wish to devote more time to hobbies. Both of these things cost money, and need to be added to the monthly budget.

Once you come up with a number, you need to determine where that money will come from. For example, say your number is $5000 per month. Some of that money may be coming to you already in the form of Social Security and/or a pension. To flesh out this example, let’s assume that $2000 of your $5000 will come from these “fixed income” sources. That leaves $3000 of monthly income for you to fund.

If you have a retirement plan (such as a 401K), you could just withdraw $3000 each month from the 401K plan after you retire. But how long will it last? You’d better think that one through - It would be pretty inconvenient to run out of money in your first few years of retirement.

For this reason, experts say that you probably shouldn’t pull more than about 3% of your income from an account made up of potentially volatile investments. So if you wanted to pull $3000 out of a 401K style account, you would need to start with about $1,200,000 or more.

The so-called “systematic withdrawal” method I am describing is only one approach. Perhaps you want to do something else with a chunk of your money (like give it to your children now). You might consider the insured guaranteed income approach. This approach exploits the risk-reducing capability of an insurance company to spread “timing risk” among thousands of individuals. Because the insurance company can accurately time how long (on average) payments will need to be made, this approach requires less money up front.

If it took $1,200,000 to safely provide $3,000 per month of income for life, the insured guaranteed income approach might produce the same income, guaranteed for your life, for $600,000 to $700,000. Neither approach is necessarily superior, and both should be carefully evaluated by you and your advisor.

Well, that’s enough for now – next time we’ll discuss how to give, when to give and how to protect your wishes.

Byron is a Certified Financial Planner and Managing Director of the Planning Group at Argent Advisors, Inc.
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