As your parents age, it is inevitable that you will need to become more involved in their affairs. Given that very few South Africans are in a financial position to retire, your parent’s retirement plan may be a concern for you – especially if there is a likelihood that you will need to provide them with financial support at some stage in the future. Opening channels of communication with your parents to allow for discussions around their retirement plan may help to avoid unpleasant surprises later on. In doing so, consider the following set of 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. The increasing costs of living – exacerbated by the pandemic, energy crisis and fuel hikes – means that your parents may be eating through their capital quicker than anticipated. While many retirees choose to bury their heads in the sand and hope for the best, this strategy will not solve the potential problem of a capital shortfall. Retirees who fear that they have insufficient retirement capital very often fall prey to unrealistic promises that can further compromise their position. Further, the danger of your parents focussing only on tax efficiency may lead them to run into liquidity problems later in their retirement. This can happen where retirees use up their discretionary savings in the early part of retirement to fund their living costs, leaving them only the funds in their annuity structures to cover their costs later in retirement, keeping in mind that these funds are subject to withdrawal restrictions. This could place them in a position where they have invested capital but are unable to access it.
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?
It’s important to know whether your parents have a post-retirement budget in place and whether they are sticking to it. If they’re not living within their means, this can result in cashflow problems later on. If necessary, help your parents draft a realistic budget, and set up a system for them to record and track their expenditure. One way of reducing costs is to make use of pensioner discounts, so you may need to help your parents sign up for these online. The massive move away from personal banking to online banking has left many elderly people feeling confused and helpless when it comes to understanding how the new world of banking works, so help your parents set up their online banking, OTP facilities, passwords, and back-ups. Remember to exercise patience when bringing them up to speed with technology.
What are your sources of retirement income?
Related questions: Do you have an independent financial advisor? Have you had cashflow modelling and future liquidity calculations done? 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?
The retirement planning profession is relatively new, and it is quite possible that your parents have never sought advice from an independent advisor. If not, it is likely that they’ve never had any cashflow modelling or projections prepared for them, and that they have no real insight into how long their money will last. If they’re invested in a living annuity, it is important to ensure that they are adequately invested to ensure that their chosen strategy is fully aligned with their risk profile and the returns required. It’s also important to ensure that they are not drawing down too much from their capital. The first prize is to determine their various sources of retirement income, and understand how their money is invested. Ideally, encourage them to have a retirement plan prepared for them by an independent professional.
Do you have adequate medical aid and gap cover in place?
Related questions: What healthcare 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?
In an attempt to cut costs, many retirees downscale their medical aid plan options or cancel their medical aid membership altogether. Take time to understand exactly what medical aid and gap cover benefits your parents have in place and ensure that they are using their benefits and the various chronic condition programmes correctly. Medical aids have changed dramatically from the traditional medical aid plans your parents enjoyed a few decades ago, and are now much more complex, tech-heavy, and rewards-driven than ever before. Gap cover, which is a short-term insurance product, is still fairly affordable and many providers have no age limit for joining, so if your parents don’t have a gap cover policy in place, consider helping them obtain membership.
Determine whether your parents have a living will in place, and where it is located. This document can prove to be invaluable, especially where a parent is left in a vegetative medical state with no chance of survival in the absence of medical intervention.
Do you have any debt?
Related questions: Do you have assets that can be realised to settle your debt? How are you servicing this debt? Are you incurring more debt?
Having debt in retirement is never a good idea, so determine whether your parents have any debt that they are servicing, and to what extent. If necessary, set up a debt reduction plan for them so that they can commit to paying off their debt as quickly as possible. If they are going into further debt to cover their living expenses, urgent intervention is necessary as this is simply not sustainable. In such circumstances, you will need to help them cut costs and possibly look at ways to generate some form of additional income.
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 benefits and make sure that their beneficiary nominations are still relevant. Determine whether they have any dread disease cover in place as this may be useful cover to have if either of them is diagnosed with a severe illness. If their life cover is geared to provide liquidity in their estates, ensure that the cover is correctly structured to achieve this purpose. Importantly, ensure that they are not paying for life cover they no longer need.
Do you have a documented estate plan in place?
Related questions: When last was your estate plan updated? Where is your will? 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?
While you do not necessarily need to know the contents of your parents’ will, it is a good idea to get assurance that they have a will in place and to know the whereabouts of it. If your parents haven’t updated or reviewed their will for some time, encourage them to read through it to check that it still reflects their wishes. Determine whether they are still comfortable with the person (or people) that they’ve nominated as executor, and that the document accounts for all their assets. Remember, if your parents begin to lose mental acuity, they will be unable to update their will, so this is something that should be encouraged while they have full mental capacity.
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?
If your parents are fortunate enough to still have each other, it’s important to have conversations about what would happen in the event of one of them passing. 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 a frailcare facility? Can you afford home nursing? Who would you grant a power of attorney to? Have you drafted an Advance Healthcare Directive? Have you appointed a medical proxy?
Your parents need to think realistically about the possibility that one or both of them may become physically or mentally incapacitated and unable to care for themselves. Frailcare, assisted living and/or home nursing can be prohibitively expensive, and very often the burden of caring for elderly parents falls on the adult children – the knock-on effects of which can be enormous. Ideally, your parents should take responsibility for putting their names down at a number of frailcare facilities or homes to ensure that there is availability if or when the time arises.
If your parents are becoming increasing physically incapable of attending to their affairs, talk to them about a power of attorney. If a parent is diagnosed with a terminal illness, such as cancer or dementia, talk to them about drafting an Advance Healthcare Directive which is an extremely useful document for expressing one’s end-of-life wishes and providing loved ones with guidance on how their parent would like to be cared for medically. This document also allows terminally ill parents to appoint a medical representative to make medical decisions on their behalf if they are in a position where they are unable to.
Ageing is stressful and it is important that these conversations are held in a dignified and respectful manner. Allow your parents to express their fears and concerns, while at the same time giving them assurance that you will be there to guide and care for them. Your parent’s retirement plan directly impacts yours, so make time to have these important conversations and gain deeper insight into their affairs.