Several years ago, a couple in their 40’s came in to talk about their financial planning. I asked about their retirement savings. They both smiled.
“Oh, we’re not concerned,” the wife said. She explained that her parents had promised them a sizable inheritance, so the couple had no worries about their long-term future.
I was the only one in the room who had a “what if?” moment—because I know too much about risk. We have a natural human tendency to believe the stories that present us with the best-case outcome, but part of my job as a financial planner is to stick a pin in that bubble and ask some hard questions.
So I asked if their inheritance was secured in a trust, in a way that ensured it would wind up in their pockets.
No, they said. It was all in a large life insurance policy. I asked whether they were 100 percent certain that her parents would continue to pay the premiums on the policy. Of course, they said. Why would anything stop them?
Lo and behold, the parents made some terrible investment decisions coupled with a lavish lifestyle, and a few years later they trashed the policy. The end result was that my client and her two siblings wound up with equal shares of the cash value that remained when the policy was surrendered: $80,000 each. So much for a big inheritance to fund a secure retirement.
It’s a hard idea for anyone to swallow, but if your own parents can put your inheritance at risk, is anything safe when it comes to your finances?
When you invest your money, put aside funds for your future or your children’s future, buy a house, or start a business, there’s always a risk that something will go wrong. You can’t control all of the risks. But with the help of a financial advisor you can identify the best ways to head off certain possible scenarios and put a backup plan in place in case something happens that’s out of your control.
When faced with important financial decisions, ask yourself the following:
- What is the worst-case scenario?
- How will my life change and who is impacted by the wrong decision?
- What potential remedies are available?
- What would have to happen to bring me to a difference decision? In other words, to recognize that the risk is too great for the potential reward.
- Who can provide me with more information before I make my decision?
- Can I live with the regret regardless of my decision?
I wish the couple with the would-be inheritance had followed the example of the Federal Reserve, which is now setting up a plan to make sure that the U.S. financial system will be able to function and meet demands for cash in case climate changes produce a severe weather event. If so, the couple might have sat down with her parents and siblings to talk about how to protect the money before it was too late.
They might have asked her parents to provide them with the option of paying the premiums themselves to keep their inheritance intact. I’ve written about how tough it can be to talk about money with your parents, but it’s also sad to think that this couple could have saved their family fortune if they’d just recognized the risks. Her parents’ pride and embarrassment over their financial struggle caused unnecessary heartache and stress.
These days I’m hearing from a lot of people who are putting money into the hottest IPO’s and assuming the price will explode. Or they’re taking on bigger mortgages than they can afford, counting on a bonus and a promotion to boost them into a new comfort zone. There are even people who are sure they’re going to win the lottery someday. But what if the IPO’s go south, or the new homeowner doesn’t get the promotion, or the 175 million-to-one odds against winning the lottery continue to work against you?
I’m not actually a pessimist, but since it’s my job to remind people that things might go wrong, I also have a storehouse of techniques for hedging risk. That’s why you diversify your portfolio. It’s why you make sure you have enough to meet your needs in an emergency, and your college and retirement savings are secure. Then you can take a small slice of your portfolio and have a little fun in Las Vegas, or betting on aggressive growth stocks. But don’t expect anything except a loss that you can live with.