For the first 30 years of your life, your parents worry about you. For the next 30, you worry about them! Even the idea that your parents are getting older and may need your help physically and emotionally takes some getting used to, but that’s just life! The one aspect you definitely need to think about is how to help your parents prepare financially for retirement. Here are some things you need to think about.
The Retired Life
Today, the typical age of retirement is about 60. With growing life expectancy, your parents need to plan for a retired life of at least 25 years. This is a period during which their income would be greatly reduced but expenses may not. In fact, these could go up.
In a way, it is lucky that a majority of the previous generation worked in the public sector or with the government — a lot of them have a pension income today. While this is one steady stream, it may not be sufficient to cover all of their expenses. Here is where supplementing this with additional investments becomes important.
Wealth for Health
First off, check whether your parents have adequate health insurance — often, the parental coverage your employer provides may not suffice. When buying a separate medical policy for your parents, make sure it covers critical illnesses. Also check when the policy cover becomes effective — some policies cover common age-related ailments like joint replacement and arthritis only 2–3 years after policy commencement. The older your parents are, the more limiting policy terms become and the higher the premium they will have to pay. So, it’s best to apply sooner rather than later, if they don’t have a good policy already.
A Rainy Day May Be Just Around The Corner
Parents have a tendency to spend a lot of their retirement benefits on us, their children — they pay for weddings, spend lavishly on grandchildren, and insist on helping us with our home loans. So it’s up to us to help them understand the importance of having an emergency fund.
The usual tendency of that generation is to put all of their money (PF payouts, retirement benefits, etc.) in an FD and live off the interest. Nothing could be worse because of the abysmal post-tax returns FDs give. The real reason they don’t think beyond FDs is the risk factor. “At my age, I cannot afford to lose money” is a real fear and you must respect it. Encourage them to invest a bulk of their retirement benefits in instruments that give easy liquidity and good returns at low risk levels.
Investing Retirement Benefits: Dos & Don’ts
No ULIPs. No Term Insurance
While medical insurance is important, a big term insurance for life is not a good idea for anyone who’s left their earning years behind them. Neither are ULIPs that combine investments and insurance — the two are best kept separate. These not only generate poor returns of 4–5% but also have long lock-in periods.
Fixed income funds are a great alternative to FDs and it is a good idea to invest a lump sum from retirement benefits in these. These typically follow an accrual strategy, which means that they tend to invest in companies for the long term and benefit from the returns. They will also benefit from indexation for any Debt funds held for more than 3 years. The tax liability can come down to 2–5% of the gains as opposed to 30% on Fixed Deposits!!
Limiting Equity Exposure
For anyone who’s retired, no more than 30% of their portfolio should be in equity. However, if your parents have money they know they are not going to use or need for at least 5 years, they can consider moving this into equity-led portfolios through a Systematic Transfer Plan (STP).
We recommend these Safe Investment Options for people over the age of 60. These allow you to put your money in low risk portfolios that even large firms invest in and still get double the returns of FDs. There is no lock-in period, so the money is available to you anytime they need it. Here’s a look at the returns you get when you invest 5 lakhs for a period of 1 year in such funds as compared to FDs.
SIPs Are Always A Good Idea
Remember that financial independence post retirement will be very important to your parents. So, in addition to a monthly income for their living expenses and an emergency fund for their medical requirements, a disposable lump sum coming their way every 3–4 years will let them spend on the things they want to do: take a vacation, get gifts for their grandchildren, or contribute to family functions like weddings.
Even when monthly income is reduced during retirement, it is possible to put by a little bit every month and keep building wealth. For this, choose conservative portfolios that minimize equity exposure and offer stable, consistent returns. The returns also become tax-free after 1 year. Here’s a look at how an Equity Savings Fund performs at a monthly investment of just Rs.3000 over a 3-year period.
Get them started sooner in their journeys of managing their corpuses. The benefit on taxation is enough to switch out of FDs. Given the long life expectancies, it is important to get more structured about managing the retirement nest egg!
This article was first published on LinkedIn by Prateek Mehta