Start the chat about retirement earlier

Tips to share with your parents

RETIREMENT can be an uncomfortable topic for children to discuss with their parents, as it is challenging for both parties to accept the inevitable effects of ageing and the impact – both financially and emotionally – that this is likely to have on the family.

Failing to have this conversation, however, could result in a situation where parents have no choice but to depend on their offspring in their golden years, placing stress on not only their pockets, but also their relationship.

According to Emma Heap, managing director of retail at 10X Investments, having a conversation of this nature also allows individuals to get a glimpse of what responsibility lies ahead for them and learn from their parents’ retirement planning mistakes where possible.

“Being ill-prepared for retirement does not just put financial pressure on the individual, but also on their relatives, placing them in the morally and financially difficult position of having to assume a level of responsibility.

“Regrettably, this financial responsibility is often shouldered at the expense of their own retirement saving, which simply perpetuates a cycle of illplanning and dependency,” she said.

Heap suggests four helpful discussion points that individuals can focus on when having this difficult conversation with their parents: Do they have a financial plan and budget that matches their retirement goals?

This financial plan should set out their goals and how they intend to fund these. Consider the most appropriate way to deal with their retirement fund and other assets.

In order to do this, it is important to review your parents’ net worth, which is essentially their retirement savings and other assets, less their debts.

How will they maximise the value of this money?

With the portion of retirement fund proceeds which they choose to not withdraw as a cash lump sum, your parents will be required to buy an annuity.

This will involve choosing between a living annuity and a life (guaranteed) annuity at retirement. A life annuity is when the insurer pays you a specified monthly pension for the rest of your life. This insures you against longevity risk as well as investment risk. The drawback is that your capital dies with you, and no money passes on to your heirs. Whereas a living annuity transfers the risk and responsibility of securing an adequate income for life on to your shoulders. In return, you have greater investment and income flexibility and your heirs inherit whatever is left of your capital.

What about their estate? Find out if your parents have an updated will in place, and if they don’t, encourage them to draw one up or update it if necessary. The same goes for any nomination forms on their policies, so ensure that these reflect their latest intentions and circumstances.

Review your parents’ net worth and assets