Estate Planning Lessons for Grandkids from the Crisis

The bubble, its bursting, and the continuing financial crisis provided many lessons in personal finance and Estate Planning. The biggest beneficiaries can be today’s young people, if they learn the right estate planning lessons. News reports and some surveys indicate that some are taking away the right ideas, but others are drawing the wrong conclusions and making their futures more difficult than they need to be. Here’s my take on what young people can learn from the mistakes, hardships, and successes of their predecessors.

Generate income.

Anecdotes and data indicate many young adults are willing to stay at home and be unemployed when they can’t find the “right job.” That’s a mistake. There’s an advantage to being out in the workplace in any job. When considering young people, prospective employers prefer people who’ve demonstrated they can show up for a job regularly and on time, work with others, and follow directions. Also, holding a job, any job, means the worker has a foot in the door. It could lead to a promotion or a contact that leads to the type of career the person really wants. Finally, generating income during the early years is important. It increases personal savings and eventually Social Security. Accumulating any savings in the early years and allowing its earnings to compound for decades is very powerful.

Estate Planning for a different future.

Every generation faces a different economy, standard of living, and other factors. Young people shouldn’t plan to replicate the world they grew up in. I suspect successful people over the next few decades will consume less and save more than immediate past generations. They’ll discard existing rules of thumb such as “Buy the most expensive house you can.” They’re also unlikely to be looking forward to upgrading to a larger, more expensive home or plan on leveraging growing home equity. Look forward instead of backward.

Save enough.

The major mistake of most Baby Boomers is not saving enough. Studies and projections indicate that a person should save 10% to 15% of gross income annually throughout a career to have a high probability of funding an adequate retirement at an age when the person wants to retire. The longer you wait to begin that saving, the higher the percentage rises and the longer you have to work. Those who are nearing retirement and didn’t follow this advice when younger are being told now they have to save 30% and more of their income and work longer than they anticipated.

The great bull market bailed out many Baby Boomers, at least for a while. You shouldn’t rely on above average investment returns to make up for inadequate saving.

Invest long-term.

Young people who are working and saving too often are looking at what’s happened in the stock market most recently and deciding to invest for safety. They’re earning the near-zero yields on today’s safe investments. They should do that for a portion of their money that will cover about six months of necessary living expenses. But most of their money should be invested for the long-term.

Young people don’t need to worry about the volatility of investments with their retirement funds the way those nearing retirement do. They should have diversified portfolios with exposure to assets that do well in the different economic environments. They want stocks, bonds, inflation hedges, and commodities. The highest growth is in the emerging economies, so they want stock exposure to those markets for the long-term. In an employer 401(k) plan they might receive this exposure by building their portfolios among the funds offered in the plan or through a target date fund. Outside a 401(k) they can put together a diversified portfolio, or they can use an asset allocation fund or a balanced fund.

Be optimistic and forward looking in your estate planning.

Economies and stock markets have long-term cycles. While the outlook for the next few years isn’t bright because of the deleveraging in the developed world, eventually the debt will be worked off. I anticipate that a new period of bullishness and above-average growth will occur somewhere around 2020. It could happen sooner, since everything seems to happen faster than it used to. A young person is better off riding the coming years in a diversified portfolio instead of hunkering down for safety.

RW January 2012.