Just at the point where you finally feel your own mid-life finances are under control (401k, Roth IRA, emergency fund, 529 savings account—check!), it’s time to start getting involved with your aging parents’ finances, or so it seems.
Starting the conversation about money can be hard—if not downright tricky. It’s fraught with emotions, hard decisions, and, of course, money itself. Not to mention, even when you have the conversation with your parents, it may not cover all the bases. According to a study conducted by Fidelity in 2012, 65% of adult children and parents said that discussing retirement readiness is important, and yet just 11% of children believe the conversations they had about retirement planning were detailed.
If you find yourself being asked to step in and offer guidance to your parents for planning their golden years, here are some tips for how to manage.
Get comfortable with the subject.
As your parents age, it’s important to open the channels of communication with them because you’ll be increasingly responsible for knowing where their assets are, their general retirement strategy, and how to manage issues that arise. Use your own financial planning as a way to get the conversation started.
Pinpoint future events.
If your parents plan to move to a different neighborhood or state, sell their house, pay for a major event or education, or leave or receive an inheritance, you should at least have an idea that these things may be on the horizon because they could change how and when they plan to invest, manage tax burdens, or liquidate certain investments.
After taking these potential future changes into account, you and your parents should get a rough idea of how much they will spend once they stop working. Downsizing, plans for more travel, eliminating a commute, and medical expenses can all cause monthly expenses to fluctuate considerably in either direction, but it will help for you to have a feel for how much money your parents need to cover their spending.
Identify all potential income sources.
If your parents have pensions, annuity income, or are receiving Social Security, help them tally up these monthly payments to determine how much of their expenses will be covered by guaranteed income. The remainder will have to be funded by income generated by a retirement income investment portfolio, part-time work, or another source of income.
One of the most challenging things about managing retirement is figuring out where everything is and how to streamline the logistics of accessing money. This can be especially difficult if your parents have multiple accounts from former employers. You might offer to help them consolidate their accounts in order to save time and money. For example, your parents might want to consider rolling over old 401ks into an IRA, or perhaps setting up one checking or savings account where they can deposit all pension and Social Security payments.
Confirm an investment strategy.
Hopefully your parents already have an investment strategy in place, but if they don’t, now is a good time to evaluate their goals and determine the investment approach that will give them the best chance of reaching those goals, whether that means purchasing an annuity, hiring a financial advisor, or using a retirement-oriented portfolio.
Of course, retirement can’t be planned perfectly to the letter. Life expectancy, market performance, and a host of other unexpected events are impossible to predict and can throw wrenches in even the best laid plans. However, you can help your parents make a smoother transition to retirement by being aware of their plans and by building a trusting relationship with both them and their advisors (e.g., lawyers, accountants, financial advisors, etc.), all of whom will be essential in helping execute a sound financial strategy.
Just remember, if you’re worried your parents have not saved enough, that might be your own perception. According to the Fidelity study, most children underestimate the value of their parents’ estate by more than $100,000, on average.
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This article was published on August 20, 2014