Given that very few South Africans are financially prepared for retirement, your parent’s retirement can have direct bearing on your future financial position – especially if you’ll be required to provide financial support at some point in the future. As they age, ensuring they have sufficient retirement capital can prevent financial strain on the entire family, and knowing their financial status can help you anticipate potential support. There’s nothing quite like openness and transparency when it comes to understanding your parent’s financial position, so consider asking them the following questions:
How long will your money last at your current rate of spending?
If you carry on spending at this rate, at what point will your invested capital be depleted? Are you appropriately invested, have you taken on an appropriate amount of risk? Are you drawing income as tax-efficiently as possible without running the risk of a liquidity shortfall later in life? Have you accounted for the possibility that you could live until 100? Have you taken into consideration that medical inflation outstrips CPI by around 4% per year? What will happen if you run out of money?
Running out of money is one of the top retirement stresses, and it is likely that this plays heavily on your parents’ minds. While knowing how long their invested capital is likely to last is a critical starting point, understanding how they’re invested and the likelihood of liquidity problems arising are also important factors. The danger of retirees focusing only on tax efficiency may result in cashflow problems later on where, for instance, they deplete their discretionary reserves early on in retirement and become dependent on their annuity income later on.
Do you have a post-retirement budget in place?
Related questions: Are you living within your means? Do you have an emergency fund in place? Are you keeping track of your expenditure? Are you taking advantage of your pensioner discounts? Is your internet banking set up correctly and secured?
If your parents are not living within their means, cashflow problems are likely to arise which could put financial pressure on you and your siblings. Ideally, help your parents draft a realistic budget and set up a system to help them track and record their expenses. Making use of pensioner discounts is a great way to reduce expenditure, although you may need to help your parents access these discounts online. The move towards online banking has left many elderly people feeling overwhelmed and confused, so ideally help your parents set up their online banking in the least complex way.
What are your sources of retirement income?
Related questions: Do you have an independent financial advisor? Have you had cash flow modelling and future liquidity calculations prepared? Is there a chance you will run out of money in the future? If so, when? Are you appropriately invested? Are you drawing down at a sustainable level?
If your parents are invested in a living annuity, it’s important to determine whether they’re appropriately invested and that their strategy is aligned with their investment goals – and to ensure that they’re drawing down at a sustainable rate. Ideally, establish their various sources of income, understand how their money is invested and, if necessary, seek advice from an independent financial advisor who can structure a workable retirement plan for them.
Do you have adequate medical aid in place?
Related questions: What medical aid plan are you on? Have you budgeted for above-inflationary medical aid increases? Do you have a living will? Are you claiming correctly from your chronic condition benefit? Do you have a gap cover policy in place?
In an attempt to reduce costs, many retirees downscale their medical aid plan or cancel their membership altogether. Your parent’s access to private healthcare can have direct bearing on your pocket, so be sure to determine the extent of their medical aid cover and whether they have gap cover in place. Gap cover, which is a short-term insurance product, remains fairly affordable and is an excellent way of protecting against the potentially high costs of hospitalisation – the risks of which increase with age. As an aside, it’s worth determining whether your parents have signed a living will.
What long-term insurance cover do you have in place?
Related questions: Are your beneficiaries correctly nominated? Have you calculated the liquidity in your estate to ensure that your estate is solvent and liquid in the event of your death? Are you over-insured?
If your parents have long-term insurance in place, encourage them to review their cover and ensure that their beneficiary nominations are updated. Determine whether they have any whole-of-life severe illness cover in place as this may be valuable in the wake of a dread disease diagnosis. If their life cover is geared to provide liquidity in their estates, ensure that the cover is appropriately structured to achieve this purpose. Importantly, ensure that they’re not paying for life cover they no longer need.
Do you have an estate plan in place?
Related questions: When last was your estate plan updated? Where is the original of your will kept? Where do you keep your important estate planning documents? Do you know who the executor of your estate is, and are you still comfortable with that appointment?
Ensure that your parents know where the original of their will is kept and that it still reflects their estate planning wishes. Importantly, determine that they’re still comfortable with their nominated executor and that the company or firm nominated is still in existence. Bear in mind that your parents will not be able to update their wills should they become mentally incapacitated, so be sure to do it now while they still have full mental acuity.
What would happen if one of you died?
Related questions: What would the impact on your retirement income be? How would this affect your budget? Would you be able to live alone?
Depending on the nature of their retirement income, the death of the first spouse may impact their retirement income and it is important to understand what the surviving spouse would receive in terms of income going forward. It’s also important to understand what living arrangements have been made for the surviving spouse, especially if living alone is not an option.
What happens if you become physically or mentally incapacitated?
Related questions: Do you have a long-term healthcare plan? Where would you live? Have you put your name down at an assisted living facility? Can you afford home nursing? Have you drafted an Advance Healthcare Directive?
The risks of losing mental capacity increase with age and, as such, it’s important to understand your parent’s wishes should they become mentally incapacitated or unable to care for themselves. Frail care assisted living and private nursing can be prohibitively expensive and very often the burden of caring for elderly parents falls on the adult children. Accessing assisted living facilities at short notice is often difficult, so encourage your parents to register at a handful of facilities to ensure that there is availability when the time arises. A power of attorney can be a useful document to put in place if your parents are struggling to physically attend to their affairs in person. In the event of a terminal diagnosis, your parents may also consider putting an advance healthcare directive in place in which they can express their end-of-life wishes in terms of how they’d like to be cared for medically. This document also allows a terminally ill person to appoint a representative to make medical decisions on their behalf if they are unable to do so themselves.
Understanding your parent’s retirement plan is important to not only ensure their financial security but to allow you time to prepare for potential support needs and avoid unexpected financial burdens.
By fostering open communication and staying informed, you can contribute to a more secure financial future for both your parents and your family.
Have a fabulous day.
Sue
