mission statement

...promoting, nurturing, and protecting human capital.

Tuesday, February 14, 2012

windfall assets - the sandwich generation's opportunity

hello clients, prospective clients, and business alliance members.  you should avoid counting on living gifts and inherited assets from your family as a general rule.  the sandwich generation, on the other hand, may receive more than $8 trillion, at least for three quarters of them.

boston college and metlife conducted a recent inquiry concerning intergenerational wealth transfer and the sandwich generation.  numerical figures come from their published report [drucker, peter f., eschtruth, andrew, karamcheva, zhenya, munnell, alicia h., and anthony webb. "the metlife study of inheritance and wealth transfer to baby boomers." center for retirement research at boston college, 2010. web. dec 2010.]. 

living gifts and inherited assets represent a fantastic opportunity!  the fortunate sandwich generation members who have inheritable assets may receive a median $64,000 in living gifts and inherited assets.  which begs the question, what do you do with such a windfall?

knowing that this opportunity does not come too often, you should seek balance and retain professional financial counsel.  strategic efforts should focus on enjoying the windfall, satisfying legacy needs, paying off consumption debt, and building pension assets.

let us discuss the prescribed ideas in order:

a) spending the money on enjoyment

as a consumption-driven western society, we must assume that you have a socialized need to consume the money on yourself today; however, you should understand your overall financial wellness in the windfall's absence.  you could spend around 5% to 10% on yourself if you have manageable debt and a solid pension plan.

if you have minimal debt and a fantastic pension plan, you could arguably bump the spending amount beyond 10% to 25%.  my professional opinion highly cautions exceeding a 25% threshold because overspending could erode intergenerational wealth transfer opportunities.  

if your overall financial wellness requires significant care, you should cap off spending at around 5% of your windfall.  spending $3,200 on yourself in the median case should satiate your spending urges, while providing opportunity for the future.  you can always spend more but remember that you may squander a once in a lifetime opportunity.

no hard and fast rule exists, but it remains critical to reward yourself carefully.

b) satisfying legacy needs

most clients cherish grandparent and charitable gifting opportunities.  these tactics may require consulting professional tax counsel, which my clients and i routinely seek out together; most importantly, you should consider your overall financial wellness as well.

effective grandparent gifting strategies generally involve purchasing financial instruments towards education and future life prospects.  my clients favor paid-up permanent life insurance policies since grandchildren can capitalize on future coverage and cash value.  this tactic does not operate in isolation and has its pros and cons like any other financial instrument. 

imagine your grandchildren earning a doctorate, fighting hunger and disease, launching a technology startup, or purchasing a vintage sloop.  the greatest generation's gifts can fund those life prospects and dreams; however, you must navigate the funds towards your grandchildren and away from overspending or rapacious governmental tax treasuries.

charitable gifting remains a fantastic option for many sandwich generation members.  you should clearly outline your values and provide funding where you feel best suited to your value system.  this tactic may also afford potential tax immunization with proper tax consultative advice.

your charitable contributions could also land you with future extracurricular prospects.  imagine funding a nonprofit organization and having leadership opportunities down the road as an engaged volunteer.  the boundaries remain limitless, but as always, seek outside tax counsel when in doubt. 

c) paying off consumption debt

paying off consumption debt does not uniformly apply to everyone; however, our dialogue should not forget this topic.  you should allocate around 25% to 50% of your windfall towards this tactic with an extremely weak financial wellness profile.

with a moderate to strong financial wellness profile, you may not necessarily require much attention in this area.  you should not exclusively or overly focus on this topic, to the chagrin of many financial charlatan talking heads; most importantly, no hard or fast rules exists in this area, and in doubt, you should seek professional financial consultation. 

d) building pension assets

the landmark study clearly emphasized that the sandwich generation needs more preparation towards retirement readiness, even with a sizable windfall.  you should unwaveringly address avoiding outliving income and cover uninsured healthcare expenses.  addressing retirement readiness will maintain your future standard of living. 

insurance-based solutions such as extended care insurance in combination with an annuity or a life insurance policy may fortify your pension.  as an example, you can reposition your windfall and create solid extended care coverage while retaining coverage ownership.  most single premium extended care policies generally require a $50,000 minimum deposit with coverage based on age, health, and insurance structure.

a single premium repositioning tactic provides protection against outliving your income and insures against uninsured healthcare expenses.  if you do choose other investment options, you should carefully weigh a financial instruments ability to manage those two risks.  investing into volatile assets may not fit the bill and could compromise a holistic asset / liability management approach.

maximizing your windfall requires professional care and careful consideration with your beneficiaries.  you deserve nothing less!  it also demands restraint on your part.

although mendez & co. financial counselors does not provide tax advice, my clients hire me to seek out professional tax advice.  this dialogue also does not serve as financial counsel tailored to your unique situation.  it merely serves as a dialogue guidepost and thought stimulation.  

you can count on my professional judgment, my resource access, and my practical counsel.

blake mendez

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