On self-reliance

Posted by on September 22, 2009 @ 9:05 am in Retirement

This comment on Steve Utkus’ recent post about retirement struck a major chord with me:

“Our children’s incomes are not increasing, and they have their own children to support, let alone saving for their own retirement. No one is to blame or is being stingy; we simply must plan for and take charge of our own later years.”

At the risk of disturbing a number of readers, I strongly agree with the message. My husband and I sometimes joke with our children about making sure they pick out a good nursing home for us—but we are doing our level best to make sure we don’t have to rely on them for support in years to come. Throwing up our hands once we reach a venerable age, leaving what happens to the winds, hardly seems to be what responsible adults should do—especially in an environment where our children’s standard of living could very well be lower than our own at the same ages and stages of life.

Nothing in life is guaranteed, and we’ve seen what devastation an economic downturn or an unscrupulous so-called investment expert can wreak on people’s lives and their livelihood. So, planning only goes so far, but it has to help. What parent wants his or her own needs to be a significant financial drain on a child’s resources?

So, what can we do?

My husband and I sat down and put together a realistic estimate of our expenses and plans for the future to arrive at a basis on which to make decisions. Everyone says this isn’t easy, but I don’t think it’s as difficult as reported. Once we had that, we looked to spreading out our risks.

Diversification of investments across a broad set of asset classes, with choices between index/active, growth/value, and global/domestic, is the first thing that might come to mind. Diversifying investment managers also seems to me to be a pretty important one. Had a number of Bernie Madoff’s victims or their advisors spread their investments out, they might have avoided catastrophe.

And diversifying sources of income is a good idea. Maybe an annuity is a good choice for some, as it can provide guaranteed income. (Or maybe now’s the time to acquire that rental property you’ve been considering.)

Structuring assets in before-tax (401(k), IRA) and after-tax buckets is a basic technique to diversify tax risk, giving some ability to manage withdrawals around future rising or decreasing income tax rates.

Carrying disability insurance during our working lives and long-term care insurance, if affordable, once we retire may be a way to directly reduce the risk we’ll need to be supported by our children later on.

These are some potential steps we can take to protect what we’ve accumulated and reduce the risk of family dependency. What are you doing?

Note: All investments are subject to risk. Diversification does not ensure a profit or protect against a loss in a declining market. Links to third-party websites will open new browser windows. Vanguard accepts no responsibility for content on external sites.

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