Make sure your parents have given careful consideration to their retirement decisions, writes Niel Kassleman, Liberty Financial Adviser.
It is estimated that less than 6% of South Africans will retire comfortably. Too many people don't know how much they need to put away to maintain their standard of living after retirement. The low rate of retirement provision among South Africans means most adult children will need to support their elderly parents in one way or another for many years.
To help your parents prepare their finances for retirement and to help you establish the impact of their retirement on your financial situation, here are five questions you should ask them:
Have you explored all available options and do you understand them? On retirement, the decisions you make about how to manage retirement funds could be binding for life. Some retirement options available to investors do not permit them to exit, even if their financial situation changes. Make sure your parents have fully understood the various options, as well as the implications on the sustainability of their income for the rest of their retirement years.
For example, if they select a guaranteed annuity, do they understand the consequences of opting for a flat annuity income in order to have a higher income today? If they select an investment-linked living annuity, do they know what drawdown would be sustainable?
Have you established a relationship with a qualified financial adviser? This leads to the next question: Who advised you? Unfortunately, an alarming number of retirees have not established a trusted relationship with a financial adviser during the course of their working lives and, in many cases, their first interaction with an adviser is when they retire.
It is important that they are making these binding decisions based on sound advice provided by a qualified individual. Retirement planning is a complex process, not a once-off sales pitch, and it requires a competent adviser who will work with them throughout their retirement years.
How do you know if their adviser is well qualified? Find out what questions he or she asked your parents, whether the adviser insisted both parents be present at the meetings and how much financial planning and cash flow analysis went into the recommendations. Ask whether a properly drafted will was part of the process and where would you find a copy.
Your parents should also be asking questions of the adviser to get a sense of their knowledge and experience.
Do you mind if I meet with the adviser? Meeting with your parents’ financial adviser is not about “checking up” on them. It will enable you to establish a relationship with the person entrusted with their finances. If issues or problems arise, the adviser should feel comfortable about contacting you and vice versa. This is also an opportunity to establish the state of your parents’ finances.
Is there sufficient capital to provide for your needs? As the person who will most likely be financially responsible for your parents if they run out of funds in retirement, you have a right to know what you’re in for as early as possible. If the adviser finds that your parents don’t have sufficient capital to see them through retirement, it’s best to put a plan in place as soon as possible.
By providing an extra few thousand rand a month to supplement their income, you allow them to maintain a sustainable drawdown, which will see them through their lifetime. The worst-case scenario would be for your parents to drawdown too much capital in the early years of their retirement, depleting their capital. This would leave you having to cover all their living expenses at a time when you’re about to start your own retirement journey.
What have you been advised to do with your life cover? In many cases, your parents would have taken out life cover when you were much younger to protect you financially if something happened to them. In some instances, they will have paid these policies for thirty years or more, yet at retirement they are often advised to cancel the policy as they cannot afford the premium and the need for the cover is no longer present.
However, this is actually an opportunity to provide an inheritance for their children. By taking over your parent’s life cover, you can unlock the value in the many years of premiums paid. Even if your parents live until they are 100, the amount you will pay on their cover will never come close to the funds paid out on their deaths. Many parents worry that they won’t be able to leave their children an inheritance due to them underfunding their retirement, so this is one way to unlock the value of all those premiums they paid.
Approach these conversations with respect These are not easy conversations to have and you don’t have to have them in a formal manner. These are conversations you can bring up around the dinner table or on a family holiday. Spend time understanding how you can respectfully help your parents age with dignity.
Discuss where they plan to live in their retirement. Will they continue to live in their home or do they plan to move into a retirement village?
Ask what they would like to do if they become too frail to live on their own. Do they want to go to a retirement village or move in with family?
Find out what decisions they want you to make for them if they cannot make them for themselves.