Culture Vs. Shifting Economic Reality
Journal of Financial Planning: October 2018
It is with great interest that I read Meir Statman’s column, “Culture Matters to Clients, and It Should Matter to Planners,” in the August issue of the Journal. I am always arguing with my parents, who grew up in the Communist Soviet Union, to stop giving me and my sister money, which they can ill afford. They can’t imagine not doing so.
When it comes to who is expected to support whom and how, culture derives from the underlying country’s personal financial reality, which in turn is based on the country’s spending policies. Take the example that Statman describes of an American parent who agrees to pay for his daughter’s education, but refuses to financially support her further, in contrast to the Israeli parents who expect to help their children buy a home and provide support well into their adult lives.
In Israel, as in other countries with a strong Socialist tradition, higher education is heavily subsidized, and there is universal medical coverage demanding little financial outlay from individuals. Therefore, typical American upper-middle class parents, who usually don’t get financial aid, are facing an education expense of $100,000 to $200,000 per child, while the Israeli parents’ cost is nominal. Furthermore, American elderly face high medical costs, with a high likelihood of astronomical long-term care costs as well. On the other hand, while the costs of education and medical care are low in Israel, everything else is much more expensive. This makes home ownership out of reach for many young adults, especially considering that you need 50 percent as the down payment compared to 10 percent in the U.S. Therefore, what looks like “culture” is really an expression of the personal financial landscape in a country.
Serious financial problems can occur when this landscape shifts while cultural expectations remain the same. Parents’ desire to help their children can border on sacrosanct, especially when their own parents made enormous sacrifices for them. This may cause them to want to gift significantly more than they can afford, placing their future financial well-being in jeopardy.
Explaining to clients the need for larger assets to fund longer retirements, high medical costs, and potential long-term care expenses is imperative, but often not enough. We need to question common assumptions made in American financial planning such as the parents’ expecting to live on their own and maintaining the same level of expenses throughout their lives. It may be that the parents expect to move in with their adult children, which in turn would lead to lower expenses. This may also cause the parents to view financial help for advanced education and housing to be the best investment for their own long-term financial benefit. In this case, it would be a good idea to include the adult children in the discussions to make sure everyone is on the same page.
We can also suggest less financially harmful ways for parents to help their children. One possibility is to combine a smaller gift with an interest-free loan. Another is to purchase a whole-life insurance policy to provide an inheritance for the children. As with any other client whose spending makes us queasy, we can also suggest an annuity to insure a base level of income. Insuring their own financial stability is, after all, the best gift they can give their children.
—Marina Goodman, CFP®, CFA
Providence, R.I., former investment strategist and portoflio manager; current high school math teacher