Why Your Retirement Is at Risk

... and how to avoid it.

By Erin Botsford

The Big Retirement Risk by Erin Botsford

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I did not expect to be a grandparent at the young age of 53! Adding to my surprise, I found out the news via Skype from Afghanistan! My son, my only child, is a captain in the U.S. Air Force on his fifth deployment in four years.

Not too long after I got off the call, I began to ask myself, "What does this mean for me? What does this mean for my son and daughter-in-law? What does this mean for my future grandchild?" My husband was amazed at how quickly I changed from grandma-meltdown mode to financial-planner mode, my usual role in life.

Because I work with grandparents and their finances every day, I am very familiar with the issues we are often confronted with:

  • The pregnant mother's health. To ensure the mother receives the proper prenatal care and has a safe delivery, many grandparents offer to pay for things such as prenatal vitamins or for an upgrade on the hospital room.
  • Child care. Some grandparents offer to pay for day care or nanny, or even volunteer to be take care of their grandchildren themselves.
  • Primary education. When deciding whether a child should go to public or private school, grandparents who feel strongly about private education may offer to pay or help contribute.
  • College education. Most grandparents want to ensure that their grandchildren are able to go to college, so many immediately start saving to help with the cost.
  • Family vacations. Grandparents often offer to host their grandchildren for the summer, take the family on a cruise, or rent an RV for a cross-country trip.
  • Long-term planning. Some grandparents are purchasing 20 year life insurance on their sons or son-in-laws if they are the primary bread winner. This way if anything were to happen, the financial burden of caring for the new child, or multiple children, would not permanently fall on the grandparents.

The Biggest Risk

While many grandparents feel it is their responsibility to help their children and grandchildren financially, you first need to assess your lifestyle to make sure you're not putting your own finances in jeopardy by doing so. In my book, The Big Retirement Risk, I emphasize the importance of Lifestyle Driven Investing as a way to produce cash flow, the basis of a retiree's lifestyle.

Lifestyle driven investments are a way to frame your investment options and make decisions to fund the needs you have in life. These investments should meet the following criteria:

  • Must produce an income, either now or in the future, when you need it.
  • The income produced must be considered safe, predictable, or guaranteed.
  • They should be in a legal entity that can provide a level of asset protection in the event of a lawsuit.
  • They should have the ability to achieve some element of growth or appreciation.

Here are some examples:

  • Bonds, which can produce viable cash flow if purchased at the right interest rate.
  • Real Estate, which has proven a successful method to create retirement income for as long as our country has existed.
  • Annuities, which can provide an income, now or in the future, that is safe and guaranteed.

No one benefits if a grandparent runs out of money while trying to help the rest of the family, so you always need to evaluate your current income to determine what you have to contribute. Before determining where to invest, I advise clients to complete the following steps:

  1. Quantify. Determine your expenses based on your needs and desires. Everyone defines these factors differently, so outlining them will clearly show you your lifestyle, investment risk tolerance, and what you consider to be your priorities.
  2. Define your expected sources of income. Map out how you pay for everything. Do you receive income from a pension, Social Security, and/or other dependable income sources, such as rent, royalties, or payments from a settlement?
  3. Calculate your existing financial resources. Determine the liquid assets you could turn into investments to provide income to support your lifestyle. Examples include cash savings, stocks, bonds, and retirement accounts.
  4. Find the gaps. Calculate whether you actually have enough money to live your desired lifestyle. Subtract the total amount needed from your anticipated income to determine if you have a shortfall or surplus each month

Once you have determined what you need to live comfortably, you can begin to explore other investment options, which may be riskier, but tend to be popular among retirees who have already secured their preferred lifestyle. Examples of such hybrid and non-lifestyle investments include:

  • Hedge Funds
  • Foreign Currencies
  • Hard assets (gold, silver, platinum)
  • Preferred stocks, which combine characteristics of stocks and bonds and tend to pay higher dividends
  • Commodities, such as equipment leasing companies
  • Mastered Limited Partnerships (MLPs) – energy-related opportunities, such as the transport of oil, gasoline, or natural gas

If I can leave you with one main piece of advice, it is to focus first on the investments that will produce cash flow. Before you can agree to help others, even your own children and grandchildren, you must be sure that your own finances are in order so that you will be able to live the retirement lifestyle you desire.

Erin Botsford, author of The Big Retirement Risk: Running Out of Money Before You Run Out of Time (Greenleaf) is the founder and CEO of the Botsford Group, a boutique financial planning firm with offices in Frisco, Texas, and Atlanta.

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