AARP - Segunda Juventud - A Tradition of Financial Planning

A Tradition of Financial Planning

By Alex Ormaza
June/July 2007

building financial security (junio/julio 2006)

Ricardo Merlo admires the framed watercolors he painted, which grace the wall of his just-built home in Vieques, Puerto Rico. “This is a good place to retire after living as a rolling stone,” says the Argentinean.

His wife’s job with the U.S. State Department took him to Brazil, Cuba, and the Dominican Republic. Yet between moves, the couple managed to build a solid nest egg. Now with their retirement secure, they are helping their three children prepare for the future.

“You don’t need to be born rich,” says Merlo, 60, who has enjoyed a successful career as an architect and builder and owns five properties in Maryland, West Virginia, and Puerto Rico. “But you do need to learn how to make wise use of the resources you have. I’ve always tried to teach my children strategies to build a safe financial future.” And that’s the legacy he’s passing on to his children, who are in turn passing it on to the next generation.

Merlo’s family is fortunate to get this guidance. An exclusive AARP Segunda Juventud survey found that one-third of Hispanics ages 40 to 74 rely on friends and relatives for financial advice about retirement. Nearly two-thirds are, like Merlo, self-taught.

How do you teach financial lessons to your family?

As a university student in the 1970s who wanted to escape Argentina’s economic and political chaos, Merlo won a grant to study in Spain.

When he returned home, he still faced Argentina’s deep recession, but learned from it. “The recession my country went through touched the deepest part of my soul, but now I realize it was one of the most enriching experiences of my life,” Merlo says. “It taught me to save, to recognize business opportunities, and to invest knowledgeably.”

His wife, Merrie Blocker-Merlo, 59, learned about finances from her father. She earned her master’s degree and bought her first apartment in her 20s, following her dad’s advice that education and sound investing were the best ways to create wealth and ensure a healthy financial future. “Now I look at our children,” says Blocker-Merlo, “and I want to make sure we give them all the tools to be responsible and create a good retirement for themselves.”

The couple’s strategy: “We can help them up to a point,” says Blocker-Merlo. “We give them advice on the best ways to put money aside, we give them a financial boost, and we urge them to get a financial education so they can plan their lives.”

The first financial boost came seven years ago. The Merlos helped their eldest, Damián, 31, make a down payment on a condo in Ellicott City, Maryland.

“We thought long and hard before giving the down payment to Damián,” says Merlo. “This had nothing to do with our love for him. This was a financial transaction. We don’t want to jeopardize our own financial future because we don’t want to be a burden on [our children]. We made sure that the condo was in a desirable place so it would be easy to rent, if necessary, for enough money to cover the mortgage payment and the maintenance fee.”

The family’s plan was put to the test when Damián got married. When baby made three, Damian and his wife, Tatiana, decided to buy a townhouse. They made the down payment by taking out a home equity loan on the condo, got a 30-year mortgage, and then transferred the first property back to Damián’s parents. The Merlos now rent out the condo—it pays for itself—and plan to use the equity to help their two younger children, Juana, 24, and William, 18, buy their first homes.

“There’s no silver bullet for retirement planning but there are solutions for all budgets."

(“For this plan to work,” says Sharon Danes, a University of Minnesota professor and family economist, “each child is going to have to pay their payments plus interest so that the chain isn’t broken for the children who follow.” She warns that home equity loans increase the risk of losing the property on default.)

Blocker-Merlo is impressed by her son’s financial savvy. She recalls when he told her he was making an extra mortgage payment in December to deduct the additional interest on that year’s tax return. “I told him, ‘Your grandpa would be so proud of you!’ and I thought, ‘Our work here is done.’ ”

(Felipe Newlands, a financial analyst at the Terranova Financial Group in Maryland, says making an extra mortgage payment made sense for Damián, but homebuyers should ask a financial planner about the pros and cons for their individual situation.)

The Merlos are also passing on to their children wise savings strategies. Damián’s employer contributes 10 percent of his salary to a 403(b) plan, a 401(k)-like tax-advantaged retirement plan for educational institutions and nonprofits, and Damián contributes an additional 10 percent. The employer’s contribution plus his own lets him put away 20 percent of his salary free of taxes until he withdraws the money.

(Danes recommends that employees contribute to retirement vehicles to the maximum amount.)

Damián expects to pass on to his 5-year-old daughter, Ana Carolina, the Merlo legacy of teaching financial strategies. He plans to start a 529 savings plan for college. He has life insurance that would cover Tatiana and Ana Carolina if something happens to him. And already he’s opened a bank account in his daughter’s name for money she gets for her birthday or special occasions. Says Grandpa Ricardo, “Because our granddaughter gets so many toys, since Damián and Tatiana opened her savings account, I now deposit a check into her account on her birthdays.”

Newlands believes it’s always good if parents can provide financial assistance to their children—as long as they can afford to do it without compromising their own security—but points out that one-size-fits-all doesn’t apply to retirement planning. “There’s no silver bullet for retirement planning,” he says, “but there are solutions for all budgets. A good combination of strategies and an early start in the savings process—that’s the closest thing to a silver bullet.”

Because each person’s financial situation is different, it’s best to consult a tax adviser.

For more information on heallthy finances, read AARP's Building Financial Security.

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